Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2022
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 001-39068
METROCITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Georgia
47-2528408
(State or other jurisdiction ofincorporation)
(I.R.S. EmployerIdentification No.)
5114 Buford HighwayDoraville, Georgia
30340
(Address of principal executive offices)
(Zip Code)
(770) 455-4989
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each Exchange on which registered
Common Stock, par value $0.01 per share
MCBS
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 1, 2022, the registrant had 25,447,790 shares of common stock, par value $0.01 per share, issued and outstanding.
Quarterly Report on Form 10-Q
June 30, 2022
TABLE OF CONTENTS
Page
Part I.
Financial Information
Item l.
Financial Statements:
Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021
3
Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2022 and 2021
4
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2022 and 2021
5
Consolidated Statements of Shareholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2022 and 2021
6
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2022 and 2021
7
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
55
Item 4.
Controls and Procedures
56
Part II.
Other Information
Item 1.
Legal Proceedings
57
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
58
Item 5.
Item 6.
Exhibits
Signatures
59
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30,
December 31,
2022
2021
(Unaudited)
Assets:
Cash and due from banks
$
220,027
432,523
Federal funds sold
3,069
8,818
Cash and cash equivalents
223,096
441,341
Equity securities
10,778
11,386
Securities available for sale
21,394
25,733
Loans held for sale
—
Loans, less allowance for loan losses of $16,678 and $16,952, respectively
2,753,342
2,488,118
Accrued interest receivable
10,990
11,052
Federal Home Loan Bank stock
15,619
19,701
Premises and equipment, net
12,847
13,068
Operating lease right-of-use asset
8,518
9,338
Foreclosed real estate, net
3,562
3,618
SBA servicing asset
8,216
10,234
Mortgage servicing asset, net
6,090
7,747
Bank owned life insurance
68,267
59,437
Other assets
25,131
5,385
Total assets
3,167,850
3,106,158
Liabilities:
Deposits:
Non-interest-bearing demand
620,182
592,444
Interest-bearing
1,776,826
1,670,576
Total deposits
2,397,008
2,263,020
Federal Home Loan Bank advances
375,000
500,000
Other borrowings
399
459
Operating lease liability
9,031
9,861
Accrued interest payable
703
204
Other liabilities
62,640
42,391
Total liabilities
2,844,781
2,815,935
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding
Common stock, $0.01 par value, 40,000,000 shares authorized, 25,451,125 and 25,465,236 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
255
Additional paid-in capital
49,831
51,559
Retained earnings
266,426
238,577
Accumulated other comprehensive income (loss)
6,557
(168)
Total shareholders' equity
323,069
290,223
Total liabilities and shareholders' equity
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
Six Months Ended
Interest and dividend income:
Loans, including fees
32,310
25,728
63,769
48,228
Other investment income
711
159
1,203
329
1
Total interest income
33,025
25,888
64,978
48,560
Interest expense:
Deposits
2,384
919
3,523
1,911
FHLB advances and other borrowings
421
144
582
290
Total interest expense
2,805
1,063
4,105
2,201
Net interest income
30,220
24,825
60,873
46,359
Provision for loan losses
2,205
104
3,804
Net interest income after provision for loan losses
22,620
60,769
42,555
Noninterest income:
Service charges on deposit accounts
518
411
999
784
Other service charges, commissions and fees
3,647
3,877
5,806
7,275
Gain on sale of residential mortgage loans
806
2,017
Mortgage servicing income, net
(5)
(957)
96
(791)
Gain on sale of SBA loans
2,845
1,568
4,699
SBA servicing income, net
(1,077)
1,905
567
4,038
Other income
764
513
1,256
775
Total noninterest income
4,653
8,594
12,309
16,780
Noninterest expense:
Salaries and employee benefits
7,929
6,915
15,025
13,614
Occupancy and equipment
1,200
1,252
2,427
2,527
Data processing
261
283
538
591
Advertising
126
117
276
262
Other expenses
3,603
3,526
7,032
5,807
Total noninterest expense
13,119
12,093
25,298
22,801
Income before provision for income taxes
21,754
19,121
47,780
36,534
Provision for income taxes
5,654
4,728
12,251
9,160
Net income available to common shareholders
16,100
14,393
35,529
27,374
Earnings per share:
Basic
0.63
0.56
1.40
1.07
Diluted
1.38
1.06
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Net income
Other comprehensive gain (loss):
Unrealized holding losses on securities available for sale
(1,330)
167
(2,814)
(42)
Net changes in fair value of cash flow hedges
4,423
11,781
Tax effect
(773)
(2,242)
11
Other comprehensive gain (loss)
2,320
125
6,725
(31)
Comprehensive income
18,420
14,518
42,254
27,343
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
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
25,465,236
51,753
254,165
4,237
310,410
Stock based compensation expense
359
Vesting of restricted stock
101,097
(1)
Repurchase of common stock
(115,208)
(2,280)
(2,281)
Other comprehensive income
Dividends declared on common stock ($0.15 per share)
(3,839)
Balance, June 30, 2022
25,451,125
Balance, April 1, 2021
25,674,573
257
55,977
199,102
39
255,375
368
101,472
(197,377)
(2)
(3,420)
(3,422)
Dividends declared on common stock ($0.10 per share)
(2,585)
Balance, June 30, 2021
25,578,668
256
52,924
210,910
164
264,254
Six Months Ended:
Balance, January 1, 2022
553
Dividends declared on common stock ($0.30 per share)
(7,680)
Balance, January 1, 2021
55,674
188,705
195
244,831
671
Other comprehensive loss
Dividends declared on common stock ($0.20 per share)
(5,169)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
Cash flow from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion
1,416
1,452
Unrealized losses recognized on equity securities
608
Loss on sale of foreclosed real estate
15
Proceeds from sales of residential real estate loans
96,932
Gain on sale of residential mortgages
(2,017)
Origination of SBA loans held for sale
(23,391)
(57,489)
Proceeds from sales of SBA loans held for sale
24,959
62,188
(1,568)
(4,699)
Increase in cash value of bank owned life insurance
(830)
(457)
Decrease in accrued interest receivable
62
Decrease (increase) in SBA servicing rights
2,018
(1,512)
Decrease in mortgage servicing rights
1,657
3,462
(Increase) decrease in other assets
(10,101)
Increase (decrease) in accrued interest payable
499
(20)
Increase in other liabilities
19,273
15,421
Net cash flow provided by operating activities
145,718
50,459
Cash flow from investing activities:
Purchases of securities available for sale
(1,034)
Proceeds from maturities, calls or paydowns of securities available for sale
1,489
2,352
Redemption (purchase) of Federal Home Loan Bank stock
4,082
(2,304)
Increase in loans, net
(360,243)
(462,314)
Purchases of premises and equipment
(339)
(290)
Proceeds from sales of foreclosed real estate owned
41
Purchase of bank owned life insurance
(8,000)
Net cash flow used by investing activities
(362,970)
(463,590)
Cash flow from financing activities:
Dividends paid on common stock
(7,640)
(5,135)
Repurchases of common stock
Increase in deposits, net
133,988
494,942
Decrease in other borrowings, net
(60)
(9)
Proceeds from Federal Home Loan Bank advances
120,000
Repayments of Federal Home Loan Bank advances
(500,000)
(30,000)
Net cash flow (used) provided by financing activities
(993)
576,376
Net change in cash and cash equivalents
(218,245)
163,245
Cash and cash equivalents at beginning of period
150,688
Cash and cash equivalents at end of period
313,933
Supplemental schedule of noncash investing and financing activities:
Transfer of residential real estate loans to loans held for sale
94,915
Transfer of loan principal to foreclosed real estate, net of write-downs
812
Initial recognition of operating lease right-of-use assets
560
Initial recognition of operating lease liabilities
Supplemental disclosures of cash flow information - Cash paid during the year for:
Interest
3,606
2,221
Income taxes
14,453
10,127
8
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 100% of the Bank. The “Company” or “our,” as used herein, includes Metro City Bank unless the context indicates that we refer only to MetroCity Bankshares, Inc.
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 one business segment, which is community banking.
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
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:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Obligations of U.S. Government entities and agencies
5,900
States and political subdivisions
8,146
(1,307)
6,839
Mortgage-backed GSE residential
10,109
(1,454)
8,655
24,155
(2,761)
December 31, 2021
6,949
8,169
203
(11)
8,361
10,562
(150)
10,423
25,680
214
(161)
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
Fair Value
Due in one year or less
5,321
Due after one year but less than five years
1,822
1,798
Due after five years but less than ten years
Due in more than ten years
6,903
5,620
There were no securities pledged as of June 30, 2022 and December 31, 2021 to secure public deposits and repurchase agreements. There were no securities sold during the three and six months ended June 30, 2022 and 2021.
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.
Twelve Months or Less
Over Twelve Months
1,307
1,454
2,761
15,494
150
9,530
161
11,731
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 twenty securities available for sale with an unrealized loss have depreciated 15.13% from the Company’s amortized cost basis. These securities have not been in a loss position for greater than twelve months.
State and political subdivisions. The Company’s unrealized loss on eleven investments in state and political subdivision bonds relate to interest rate increases. Management currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of these investments. Because the Company does not plan to sell these investments, and because it is not more likely than not that the Company will be required to sell these investments before the recovery of the par value, which may be at maturity, management does not consider these investments to be other-than-temporarily impaired at June 30, 2022.
Mortgage-backed GSE residential. The Company’s unrealized loss on nine investments in residential GSE mortgage-backed securities was caused by interest rate increases. The contractual cash flows of the investment are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the security would not be settled at a price less than the amortized cost base of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has no immediate plans to sell the investment, and because it is not more likely than not that the Company will be required to sell the investment before recovery of their amortized cost base, which may be maturity, management does not consider this investment to be other-than-temporarily impaired at June 30, 2022.
Equity Securities
As of June 30, 2022 and December 31, 2021, the Company had equity securities with carrying values totaling $10.8 and $11.4 million, respectively. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts.
During the three and six months ended June 30, 2022, we recognized an unrealized loss of $245,000 and $608,000, respectively, in net income on our equity securities. The unrealized loss is recorded in Other Expenses on the Consolidated Statements of Income. No unrealized gains or losses on equity securities were recognized in net income during the three and six months ended June 30, 2021.
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at June 30, 2022 and December 31, 2021 are summarized as follows:
Construction and development
45,042
38,857
Commercial real estate
581,234
520,488
Commercial and industrial
57,843
73,072
Residential real estate
2,092,952
1,879,012
Consumer and other
165
79
Total loans receivable
2,777,236
2,511,508
Unearned income
(7,216)
(6,438)
Allowance for loan losses
(16,678)
(16,952)
Loans, net
Included in the commercial and industrial loans are PPP loans totaling $8.9 million and $31.0 million as of June 30, 2022 and December 31 2021, respectively.
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
Residential
Consumer
Development
Real Estate
and Industrial
and Other
Unallocated
Allowance for loan losses:
Beginning balance
93
4,294
4,441
7,624
217
16,674
Charge-offs
Recoveries
Provision
47
(757)
(224)
1,054
(121)
Ending balance
140
3,539
4,219
8,678
16,678
12
Three Months Ended June 30, 2021
190
5,738
5,142
11,735
(26)
(86)
21
1,447
51
746
(3)
(57)
211
7,162
599
5,888
13,860
Six Months Ended June 30, 2022
100
4,146
4,989
7,717
16,952
(390)
40
(611)
(383)
961
Six Months Ended June 30, 2021
178
5,161
438
4,350
10,135
(64)
(90)
2,021
225
1,538
(13)
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.
Individually evaluated for impairment
63
436
Collectively evaluated for impairment
3,476
3,783
16,179
Acquired with deteriorated credit quality
Total ending allowance balance
Loans:
23,423
1,154
5,863
30,440
44,899
555,707
56,478
2,082,331
2,739,580
Total ending loans balance
579,130
57,632
2,088,194
2,770,020
242
434
676
3,904
4,555
16,276
6,395
565
4,889
11,849
38,567
512,253
71,419
1,870,903
2,493,221
518,648
71,984
1,875,792
2,505,070
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
Investment
Principal
With No
With
Related
Balance
Allowance
23,936
234
24,170
192
1,117
1,309
29,991
1,351
31,342
5,451
957
6,408
25
585
610
10,365
1,542
11,907
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,
Average
Income
Recognized
10,974
5,188
45
416
5,251
23
6,303
16
16,641
87
11,748
64
9,006
163
5,658
157
479
5,409
6,720
36
14,894
216
12,661
199
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
Greater than
Financing
Current
30-89 Days
90 Days
Past Due
Nonaccrual
Receivables
565,171
13,959
57,486
2,079,207
3,124
2,746,928
3,126
19,966
514,179
752
3,717
70,702
788
342
1,130
152
1,859,615
11,287
4,890
2,483,142
12,827
13,169
8,759
The Company utilizes a ten grade loan rating system for its loan portfolio as follows:
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.
The following presents the Company’s loans, included purchased loans, by risk rating based on the most recent information available:
Rating:
Pass
550,576
50,017
2,081,019
2,726,676
Special Mention(1)
5,417
7,323
12,740
Substandard
23,137
292
7,175
30,604
Doubtful
Loss
499,135
64,226
1,870,902
2,472,909
13,884
7,053
20,937
5,629
705
11,224
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.
9,464
233
9,697
1,010
10,474
10,707
2,678
3,157
20
2,698
3,177
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 $498,000 and $242,000 as of June 30, 2022 and December 31, 2021, respectively, and recognized no partial charge offs on the TDR loans described above during the three and six months ended June 30, 2022 and 2021. No TDRs defaulted during the three and six months ended June 30, 2022 and 2021.
During the three and six months ended June 30, 2022, we modified two commercial real estate loans and three commercial and industrial loans as trouble debt restructurings. The total recorded investment in these modified loans were $7.6 million as of June 30, 2022. We did not modify any loans as a troubled debt restructuring during the year ended December 31, 2021. At June 30, 2022, the Company did not have any commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.
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:
Type of Concession
Deferral of payments
488
Extension of maturity date
2,689
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:
Type
Loans
10,444
3,170
1,164
11,608
3,190
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 three months. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral).
As of June 30, 2022, no loans were under approved payment deferrals. As of December 31, 2021, non-Small Business Administration (“SBA”) commercial loans and SBA loans with outstanding balances $8.1 million and $6.5 million ($1.6 million unguaranteed book balance), respectively, were under approved payment deferrals. No residential mortgages were under approved payment deferrals as of December 31, 2021.
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 $504.9 million and $543.0 million, respectively.
Activity for SBA loan servicing rights are as follows:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Beginning of period
10,395
10,374
10,091
9,488
Change in fair value
(2,333)
609
(2,029)
1,495
End of period, fair value
8,062
10,983
Fair value at June 30, 2022 and December 31, 2021 was determined using discount rates ranging from 10.50% to 16.01% and 7.57% to 12.25%, respectively, and prepayment speeds ranging from 12.82% to 17.44% and 14.43% to 17.12%, respectively, depending on the stratification of the specific right. Average default rates are based on the industry average for the applicable NAICS/SIC code.
The aggregate fair market value of the interest only strips included in SBA servicing assets was $154,000 and $143,000 at June 30, 2022 and December 31, 2021, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of fair value measurement, risk characteristics including product type and interest rate, were used to stratify the originated loan servicing rights.
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 $589.5 million and $608.2 million, respectively.
Activity for mortgage loan servicing rights and the related valuation allowance are as follows:
Mortgage loan servicing rights:
6,925
11,722
12,991
Additions
347
760
Amortization expense
(1,270)
(1,590)
(2,580)
(3,059)
Valuation allowance
88
(603)
(403)
End of period, carrying value
9,529
Valuation allowance:
441
641
Additions expensed
603
Reductions credited to operations
(88)
(163)
(200)
Direct write-downs
1,044
The fair value of servicing rights was $7.8 million $7.9 million at June 30, 2022 and December 31, 2021, respectively. Fair value at June 30, 2022 was determined by using a discount rate of 12.08%, prepayment speeds of 19.66%, and a weighted average default rate of 1.27%. Fair value at December 31, 2021 was determined using a discount rate of 13.50%, prepayment speeds of 21.79%, and a weighted average default rate of 1.22%.
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:
Convertible advance maturing August 6, 2029; fixed rate of 0.85%
20,000
Convertible advance maturing November 7, 2029; fixed rate of 0.68%
30,000
Convertible advance maturing December 5, 2029; fixed rate of 0.75%
10,000
Convertible advance maturing February 1, 2030; fixed rate of 0.59%
Convertible advance maturing August 18, 2031; fixed rate of 0.025%
50,000
Convertible advance maturing October 7, 2031; fixed rate of 0.01%
Convertible advance maturing October 8, 2031; fixed rate of 0.01%
Convertible advance maturing October 20, 2031; fixed rate of 0.01%
150,000
Convertible advance maturing December 17, 2031; fixed rate of 0.01%
Convertible advance maturing December 23, 2031; fixed rate of 0.01%
Convertible advance maturing December 30, 2031; fixed rate of 0.01%
Convertible advance maturing May 6, 2032; fixed rate of 0.83%
100,000
Convertible advance maturing June 16, 2032; fixed rate of 1.68%
Convertible advance maturing June 16, 2032; fixed rate of 1.91%
Convertible advance maturing June 23, 2032; fixed rate of 1.95%
Convertible advance maturing May 12, 2037; fixed rate of 1.14%
75,000
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 ($100.0 million), 6 months ($50.0 million), 9 months ($125.0 million) or 1 year ($100.0 million). At June 30, 2022, the Company had maximum borrowing capacity from the FHLB of $943.8 million based on the value of residential real estate loans pledged as collateral.
At June 30, 2022, the Company had unsecured federal funds lines available with correspondent banks of approximately $47.5 million. There were no advances outstanding on these lines at June 30, 2022.
At June 30, 2022, the Company had Federal Reserve Discount Window funds available of approximately $10.0 million. The funds are collateralized by a pool of commercial real estate and commercial and industrial loans totaling $29.5 million as of June 30, 2022. There were no outstanding borrowings on this line as of June 30, 2022.
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 $399,000 and $459,000, respectively.
NOTE 7 – OPERATING LEASES
The Company has entered into various operating leases for certain branch locations with terms extending through January 2031. Generally, these leases have initial lease terms of ten years or less. Many of the leases have one or more renewal options which typically are for five years at the then fair market rental rates. We assessed these renewal options using a threshold of reasonably certain. For leases where we were reasonably certain to renew, those option periods were included within the lease term, and therefore, the measurement of the right-of-use (“ROU”) asset and lease liability. None of our leases included options to terminate the lease and none had initial terms of 12 months or less (i.e. short-term leases).
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:
Operating lease cost
511
1,016
1,107
Variable lease cost
43
86
Short-term lease cost
Sublease income
Total net lease cost
554
593
1,103
1,193
Future maturities of the Company’s operating lease liabilities are summarized as follows:
Twelve Months Ended:
Lease Liability
June 30, 2023
2,003
June 30, 2024
1,909
June 30, 2025
1,770
June 30, 2026
1,521
June 30, 2027
1,249
After June 30, 2027
1,938
Total lease payments
10,390
Less: interest discount
(1,359)
Present value of lease liabilities
Supplemental Lease Information
Weighted-average remaining lease term (years)
5.3
Weighted-average discount rate
3.06
%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (cash payments)
920
987
Operating cash flows from operating leases (lease liability reduction)
790
822
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 thirteen separate interest rate swap agreements with notional amounts totaling $725.0 million. Six of the interest rate swaps are two-year forward three-year term swaps (five-year total term) where cash settlements begin in October 2023, January 2024 or April 2024. Four of the interest rate swaps are two-year forward two-year term swaps (four-year total term) where cash
settlements begin in November 2023 or April 2024. Two of the interest rate swaps are a one-year forward two-year term swap (three-year total term) and a one-year forward three-year term swap (four-year term total) where cash settlements begin in May 2023 or July 2023. The remaining interest rate swap is a 3-year spot swap where cash settlements began in June 2022. The swap agreements were designated as cash flow hedges of our deposit accounts that are indexed to the Federal Funds Effective rate. The swaps are determined to be highly effective since inception and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps amounted to an unrealized gain of $10.9 million and $46,000 and an unrealized loss of $152,000 and $46,000 at June 30, 2022 and December 31, 2021, respectively. These unrealized gains and losses are recorded in Other Assets and Other Liabilities on the Consolidated Balance Sheets. The Company expects the hedges to remain highly effective during the remaining terms of the swap.
During October 2021, the Company entered into an interest rate cap agreement with a notional amount of $50.0 million and a cap rate of 2.50%. This interest rate cap is a two-year forward three-year term (five-year total term) where cash settlements begin on November 2023. The interest rate cap was designated as a cash flow hedge of our deposit accounts that are indexed to the Federal Funds Effective rate. The rate cap premium paid by the Company at inception will be amortized on a straight line basis to deposit interest expense over the total term of the interest rate cap agreement. The fair value of the interest rate cap amounted to an unrealized gain of $1.3 million and $321,000 at June 30, 2022 and December 31, 2021, respectively, and are recorded in Other Assets on the Consolidated Balance Sheets.
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 no cash deposits pledged as collateral by the Company. At June 30, 2022, the Company held cash deposits of $12.0 million from the counterparty as collateral pledged against the large positive fair value of our interest rate derivatives.
Summary information for the interest rate swaps designated as cash flow hedges is as follows:
As of or for the
Notional Amounts
725,000
Weighted-average pay rate
2.06%
Weighted-average receive rate
0.44%
Weighted-average maturity
4.3 years
Weighted-average remaining maturity
3.9 years
Net interest (expense) income
(85)
Summary information for the interest rate caps designated as cash flow hedges is as follows:
Rate Cap Premiums
619
Cap Rate
2.50%
5.0 years
(62)
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:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
49,705
61,345
Standby letters of credit
3,958
4,674
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 $49.7 million of unused lines of credit and $4.0 million for standby letters of credit as of June 30, 2022. 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 amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.
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
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:
Total Gains
Level 1
Level 2
Level 3
(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Total securities available for sale
Interest only strip
154
Interest rate derivatives
12,192
52,580
27,686
14,116
Nonrecurring fair value measurements:
Impaired loans
1,068
Liabilities
Interest rate swaps
24
18,784
143
367
47,720
19,151
17,183
947
(7)
46
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
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
U.S. Government
Servicing
Interest Only
Entities and Agencies
Asset
Strip
Fair value, April 1, 2022
6,729
Total losses included in income
Settlements
Prepayments/paydowns
(829)
Transfers in and/or out of level 3
Fair value, June 30, 2022
Fair value, April 1, 2021
9,232
Total gains included in income
(2,023)
Fair value, June 30, 2021
7,209
172
Fair value, January 1, 2022
Total (losses)/gains included in income
(1,049)
Fair value, January 1, 2021
9,306
155
(2,097)
27
There were no gains or losses included in earnings for securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods presented above. The only activity for these securities were prepayments. There were no purchases, sales, or transfers into and out of Level 3. The following table presents quantitative information about recurring Level 3 fair value measures at June 30, 2022 and December 31, 2021:
Valuation
Unobservable
General
Technique
Input
Range
June 30, 2022:
Recurring:
Discounted cash flows
Discount rate
0%-3%
SBA servicing asset and interest only strip
Prepayment speed
12.82%-17.44%
10.50%-16.01%
Nonrecurring:
Appraised value less estimated selling costs
Estimated selling costs
6%
December 31, 2021:
14.43%-17.12%
7.57%-12.25%
Impaired Loans
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
Financial Assets:
Cash, due from banks, and federal funds sold
Investment securities
32,172
FHLB stock
N/A
2,749,212
99
10,891
SBA servicing assets
Interest only strips
Mortgage servicing assets
7,751
Financial Liabilities:
2,393,652
372,600
28
Estimated Fair Value at December 31, 2021
37,119
2,561,269
10,952
7,937
2,263,246
501,450
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 2.50% above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available for sale securities, if any, is not included in computing regulatory capital. Management believes as of June 30, 2022, the Company and Bank meets all capital adequacy requirements to which they are subject.
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:
Ratio
Amount ≥
Ratio ≥
As of June 30, 2022:
Total Capital (to Risk Weighted Assets)
Consolidated
324,972
17.60
193,838
10.5
184,607
10.0
Bank
317,641
17.21
193,820
184,590
Tier I Capital (to Risk Weighted Assets)
308,295
16.70
156,916
8.5
147,686
8.0
300,964
16.30
156,902
147,672
Common Tier 1 (CET1)
129,225
7.0
119,995
6.5
129,213
119,984
Tier 1 Capital (to Average Assets)
10.31
119,663
4.0
149,579
5.0
10.06
119,631
149,538
As of December 31, 2021:
297,108
17.77
175,564
287,258
17.18
175,525
167,166
280,156
16.76
142,123
270,306
16.17
142,091
133,733
117,043
117,016
108,658
9.44
118,682
9.11
118,667
148,333
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 2,400,000 shares of Company common stock for issuance pursuant to awards granted under the 2018 Incentive Plan, any or all of which may be granted as nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance awards and other stock-based awards. In the event all or a portion of a stock award is forfeited, cancelled, expires, or is terminated before becoming vested, paid, exercised, converted, or otherwise settled in full, any unissued or forfeited shares again become available for issuance pursuant to awards granted under the 2018 Incentive Plan and do not count against the maximum number of reserved shares. In addition, shares of common stock deducted or withheld to satisfy tax withholding obligations will be added back to the share reserve and will again be available for issuance pursuant to awards granted under the plan. The 2018 Incentive Plan is administered by the Compensation Committee of our Board of Directors (the “Committee”). The determination of award recipients under the 2018 Incentive Plan, and the terms of those awards, will be made by the Committee. At June 30, 2022, 240,000 stock options had been granted and 585,444 shares of restricted stock had been issued under the 2018 Incentive Plan.
30
Stock Options
A summary of stock option activity for the six months ended June 30, 2022 is presented below:
Weighted
Exercise Price
Outstanding at January 1, 2022
240,000
12.70
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 $0 and $119,000, respectively. During the six months ended June 30, 2022 and 2021, the Company recognized compensation expense for stock options of $0 and $238,000, respectively. As of both June 30, 2022 and December 31, 2021, there was $0 of total unrecognized compensation cost related to options granted under the 2018 Incentive Plan. As of June 30, 2022, all of the cost related to the outstanding stock options had been recognized.
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 equal annual installments on the first three anniversaries of the grant date. Shares of restricted stock units issued to directors vest 25% on the grant date and 25% on each of the first three anniversaries of the grant date.
A summary of restricted stock activity for the six months ended June 30, 2022 is presented below:
Weighted-
Average Grant-
Nonvested Shares
Date Fair Value
Nonvested at January 1, 2022
134,703
13.86
143,793
20.31
Vested
(101,097)
15.86
Nonvested at June 30, 2022
177,399
17.95
During the three months ended June 30, 2022 and 2021, the Company recognized compensation expense for restricted stock of $359,000 and $249,000, respectively. During the six months ended June 30, 2022 and 2021, the Company recognized compensation expense for restricted stock of $553,000 and $433,000, respectively. As of June 30, 2022 and December 31, 2021, there was $3.7 million and $1.4 million, respectively, of total unrecognized compensation cost related to nonvested shares granted under the 2018 Incentive Plan. As of June 30, 2022, the cost is expected to be recognized over a weighted-average period of 2.6 years.
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NOTE 13 – EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
Basic earnings per share
Net Income
Weighted average common shares outstanding
25,459,003
25,642,350
25,462,102
25,658,373
Basic earnings per common share
Diluted earnings per share
Weighted average common shares outstanding for basic earnings per common share
Add: Dilutive effects of restricted stock and options
270,153
190,978
284,589
182,157
Average shares and dilutive potential common shares
25,729,156
25,833,328
25,746,691
25,840,530
Diluted earnings per common share
There were no stock options or restricted stock excluded from the computation of diluted earnings per common share since they were antidilutive for the three and six months ended June 30, 2022 and 2021.
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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:
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35
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
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.
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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
March 31,
September 30,
Selected income statement data:
Interest income
31,953
30,857
29,324
Interest expense
1,300
1,236
1,135
30,653
29,621
28,189
546
2,579
Noninterest income
7,656
7,491
9,532
Noninterest expense
12,179
12,512
13,111
Income tax expense
6,597
6,609
5,149
19,429
17,445
16,882
Per share data:
Basic income per share
0.76
0.69
0.66
Diluted income per share
0.68
Dividends per share
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
Shares of common stock outstanding
Weighted average diluted shares
25,719,035
25,720,128
25,729,043
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
21.62
18.88
Yield on total loans
4.95
5.00
4.93
5.16
5.21
4.98
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
0.24
0.28
0.31
0.40
0.34
Cost of deposits
0.55
0.27
0.29
0.41
0.32
Net interest margin
4.26
4.16
4.15
4.57
4.60
4.21
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
0.02
0.03
Nonperforming assets to gross loans and OREO
1.22
0.61
0.67
ALL to nonperforming loans
54.79
134.39
143.69
189.44
147.82
ALL to loans held for investment
0.60
Balance sheet and capital ratios:
Gross loans held for investment to deposits
115.86
105.72
110.98
112.15
106.31
Noninterest bearing deposits to deposits
25.87
25.84
26.18
30.32
31.30
Common equity to assets
10.20
9.88
9.34
10.04
10.50
Leverage ratio
9.46
10.34
11.14
Common equity tier 1 ratio
17.24
16.61
17.75
Tier 1 risk-based capital ratio
Total risk-based capital ratio
18.22
17.64
18.72
Mortgage and SBA loan data:
Mortgage loans serviced for others
589,500
605,112
608,208
669,358
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
SBA loans serviced for others
504,894
528,227
542,991
549,818
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
56,557
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.
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
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.
Interest and
Yield /
Fees
Rate
Earning Assets:
Federal funds sold and other investments(1)
193,955
592
169,578
76
0.18
35,754
123
17,080
84
1.97
Total investments
229,709
715
1.25
186,658
160
32,647
414
5.09
47,173
615
5.23
575,917
8,403
5.85
510,241
7,344
5.77
54,423
915
6.74
146,408
2,558
7.01
1,952,730
22,545
4.63
1,275,555
15,180
4.77
266
49.76
179
69.46
Gross loans(2)
2,615,983
1,979,556
Total earning assets
2,845,692
2,166,214
Noninterest-earning assets
146,669
112,161
2,992,361
2,278,375
Interest-bearing liabilities:
NOW and savings deposits
197,460
102
0.21
107,072
53
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
1,287,462
Borrowings
246,779
94,435
Total interest-bearing liabilities
1,999,960
1,381,897
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
Net interest spread
4.09
4.48
42
296,230
956
0.65
147,760
149
36,295
253
1.41
17,619
183
2.09
332,525
1,209
0.73
165,379
332
31,621
792
5.05
44,081
1,147
5.25
562,598
16,290
5.84
500,989
14,422
5.81
59,906
1,991
6.70
149,403
4,478
6.04
1,929,915
44,619
4.66
1,172,597
28,109
4.83
236
77
65.80
177
72
82.03
2,584,276
1,867,247
2,916,801
2,032,626
144,368
111,665
3,061,169
2,144,291
192,388
0.19
99,732
1,126,233
2,517
0.45
597,028
415,196
828
506,646
1,101
0.44
1,733,817
1,203,406
356,951
0.33
90,978
2,090,768
1,294,384
600,117
522,645
67,642
75,695
667,759
598,340
302,642
251,567
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:
Volume
Yield/Rate
Total Change
Earning assets:
353
516
363
555
(185)
(16)
(201)
1,110
(51)
1,059
(1,592)
(1,643)
7,774
(409)
7,365
Consumer and Other
(4)
7,103
(521)
6,582
7,295
(158)
7,137
49
606
881
1,487
(78)
(71)
900
1,465
259
277
824
918
1,742
6,471
(1,076)
5,395
44
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
393
807
70
478
877
(273)
(82)
(355)
2,170
(302)
1,868
(2,984)
497
(2,487)
17,692
(1,182)
16,510
16,603
(1,062)
15,541
17,081
(663)
16,418
1,011
795
1,806
(118)
(155)
970
642
1,612
(207)
1,469
435
1,904
15,612
(1,098)
14,514
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:
$ Change
% Change
107
26.0
215
27.4
(230)
(5.9)
(1,469)
(20.2)
100.0
952
(99.5)
887
(112.1)
(2,845)
(100.0)
(3,131)
(66.6)
(2,982)
(156.5)
(3,471)
(86.0)
251
48.9
481
62.1
(3,941)
(45.9)
(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
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:
(Dollars in thousands )
Noninterest Expense:
1,014
14.7
1,411
10.4
(52)
(4.2)
(100)
(4.0)
(22)
(7.8)
(53)
(9.0)
7.7
2.2
1,225
21.1
1,026
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
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.
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.
% of Total
1.6
20.9
20.7
2.1
2.9
75.4
74.8
Gross loans
Less unearned income
Total loans held for investment
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
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.
Nonaccrual loans
Past due loans 90 days or more and still accruing
Accruing troubled debt restructured loans
2,697
Total nonperforming loans
11,798
Foreclosed real estate
Total nonperforming assets
34,002
15,416
Nonperforming loans to gross loans
1.10
0.47
Nonperforming assets to total assets
0.50
Allowance for loan losses to nonperforming loans
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:
Balance, beginning of period
Charge-offs:
60
390
Total charge-offs
90
Recoveries:
Total recoveries
Net charge-offs/(recoveries)
80
378
Balance, end of period
Total loans at end of period
2,099,414
Average loans(1)
2,597,019
2,571,633
Net charge-offs to average loans
Allowance for loan losses to total loans
Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of June 30, 2022.
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.
The following table summarizes our average deposit balances and weighted average rates for the three and six months ended June 30, 2022 and 2021.
Average Rate
Noninterest-bearing demand
Interest-bearing demand deposits
166,817
78,953
Savings and money market deposits
746,879
325,598
0.37
Brokered money market deposits
450,036
361,694
2,364,944
1,848,632
161,148
73,221
726,375
320,962
431,098
302,577
2,333,934
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.
Regulatory
Capital Ratio
Requirements
Minimum
including
Requirement
fully phased-
for "Well
in Capital
Capitalized"
Conservation
Depository
Buffer
Institution
Total capital (to risk-weighted assets)
8.00
10.00
Tier 1 capital (to risk-weighted assets)
6.00
8.50
CETI capital (to risk-weighted assets)
4.50
7.00
6.50
Tier 1 capital (to average assets)
4.00
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
Our board of directors establishes broad policy limits with respect to interest rate risk. As part of this policy, the asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
Evaluation of Interest Rate Risk
We use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a two year simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities.
There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Bank’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Bank’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.
Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Bank to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.
We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run three standard and plausible comparing current or flat rates with a +/- 200 basis point ramp in rates over 12 months. These rate scenarios are considered appropriate as they are neither too modest (e.g. +/- 100 basis points) or too extreme (e.g. +/- 400 basis points) given the economic and rate cycles which have unfolded in the last 25 years. This analysis also provides the foundation for historical tracking of interest rate risk. 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
(3.40)
2.70
4.20
(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
+100
(12.30)
(8.00)
(3.90)
(8.90)
(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.
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
Average Price Paid
Announced
Purchased Under
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
629,415
June 1, 2022 to June 30, 2022
55,432
19.70
573,983
115,208
19.80
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.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No.
Description of Exhibit
3.1
Restated Articles of Incorporation of MetroCity Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed September 4, 2019 (File No. 333-233625)
3.2
Amended and Restated Bylaws of MetroCity Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed September 4, 2019 (File No. 333-233625)
31.1
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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
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
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.
Date: August 5, 2022
By:
/s/ Nack Y. Paek
Nack Y. Paek
Chief Executive Officer
/s/ Lucas Stewart
Lucas Stewart
Chief Financial Officer