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 September 30, 2024
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 November 1, 2024, the registrant had 25,331,916 shares of common stock, par value $0.01 per share, issued and outstanding.
Quarterly Report on Form 10-Q
September 30, 2024
TABLE OF CONTENTS
Page
Part I.
Financial Information
Item l.
Financial Statements:
Consolidated Balance Sheets as of September30, 2024 (unaudited) and December 31, 2023
3
Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023
4
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023
5
Consolidated Statements of Shareholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023
6
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2024 and 2023
7
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
61
Item 4.
Controls and Procedures
62
Part II.
Other Information
Item 1.
Legal Proceedings
63
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
64
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
Signatures
65
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30,
December 31,
2024
2023
(Unaudited)
Assets:
Cash and due from banks
$
278,752
142,152
Federal funds sold
12,462
2,653
Cash and cash equivalents
291,214
144,805
Equity securities
10,568
10,335
Securities available for sale
18,206
18,493
Loans held for sale
4,598
22,267
Loans, less allowance for credit losses of $18,589 and $18,112, respectively
3,069,237
3,123,993
Accrued interest receivable
15,667
15,125
Federal Home Loan Bank stock
20,251
17,846
Premises and equipment, net
18,158
18,132
Operating lease right-of-use asset
7,171
8,472
Foreclosed real estate, net
1,515
1,466
SBA and USDA servicing asset
7,309
7,251
Mortgage servicing asset, net
1,296
1,273
Bank owned life insurance
72,670
70,957
Interest rate derivatives
18,895
31,781
Other assets
12,451
10,627
Total assets
3,569,206
3,502,823
Liabilities:
Deposits:
Non-interest-bearing demand
552,472
512,045
Interest-bearing
2,170,648
2,218,891
Total deposits
2,723,120
2,730,936
Federal Home Loan Bank advances
375,000
325,000
Operating lease liability
7,295
8,651
Accrued interest payable
3,593
4,133
Other liabilities
53,013
52,586
Total liabilities
3,162,021
3,121,306
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, 25,331,916 and 25,205,506 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
253
252
Additional paid-in capital
47,481
45,699
Retained earnings
348,343
315,356
Accumulated other comprehensive income
11,108
20,210
Total shareholders' equity
407,185
381,517
Total liabilities and shareholders' equity
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
Nine Months Ended
Interest and dividend income:
Loans, including fees
50,336
45,695
150,980
134,516
Other investment income
3,417
2,979
9,175
7,500
80
35
144
140
Total interest income
53,833
48,709
160,299
142,156
Interest expense:
Deposits
19,602
21,736
61,442
58,916
FHLB advances and other borrowings
3,942
2,819
10,771
7,883
Total interest expense
23,544
24,555
72,213
66,799
Net interest income
30,289
24,154
88,086
75,357
Provision for credit losses:
Provision for loan losses
653
(434)
414
(853)
Provision for unfunded commitments
(71)
53
(100)
56
Provision for credit losses
582
(381)
314
(797)
Net interest income after provision for credit losses
29,707
24,535
87,772
76,154
Noninterest income:
Service charges on deposit accounts
531
490
1,510
1,403
Other service charges, commissions and fees
1,915
1,478
5,100
3,618
Gain on sale of residential mortgage loans
526
1,925
Mortgage servicing income, net
422
(85)
1,758
(232)
Gain on sale of SBA loans
1,083
244
2,134
3,267
SBA servicing income, net
1,231
270
3,287
3,472
Other income
907
260
2,028
1,964
Total noninterest income
6,615
2,657
17,742
13,492
Noninterest expense:
Salaries and employee benefits
8,512
6,864
23,930
20,333
Occupancy and equipment
1,430
1,272
4,118
3,525
Data processing
311
300
958
928
Advertising
145
143
474
454
Other expenses
3,262
2,961
9,573
8,571
Total noninterest expense
13,660
11,540
39,053
33,811
Income before provision for income taxes
22,662
15,652
66,461
55,835
Provision for income taxes
5,961
4,224
18,192
15,569
Net income available to common shareholders
16,701
11,428
48,269
40,266
Earnings per share:
Basic
0.66
0.45
1.91
1.60
Diluted
0.65
1.89
1.58
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Net income
Other comprehensive (loss) gain:
Unrealized holding gains (losses) on securities available for sale
534
(803)
264
(587)
Net changes in fair value of cash flow hedges
(17,859)
7,249
(12,906)
18,595
Tax effect
4,851
(1,805)
3,540
(5,764)
Other comprehensive (loss) gain
(12,474)
4,641
(9,102)
12,244
Comprehensive income
4,227
16,069
39,167
52,510
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, July 1, 2024
25,331,916
46,644
336,749
23,582
407,228
Stock based compensation expense
837
Other comprehensive loss
Dividends declared on common stock ($0.20 per share)
(5,107)
Balance, September 30, 2024
Balance, July 1, 2023
25,279,846
45,516
301,752
25,642
373,163
825
Repurchase of common stock
(38,689)
(1)
(761)
(762)
Other comprehensive income
Dividends declared on common stock ($0.18 per share)
(4,591)
Balance, September 30, 2023
25,241,157
45,580
308,589
30,283
384,704
Nine Months Ended:
Balance, January 1, 2024
25,205,506
1,793
Vesting of restricted stock
126,820
1
(410)
(10)
Dividends declared on common stock ($0.60 per share)
(15,282)
Balance, January 1, 2023
25,169,709
45,298
285,832
18,039
349,421
1,596
136,171
(64,723)
(1,313)
(1,314)
Impact of adoption of new accounting standard, net of tax(1)
(3,801)
Dividends declared on common stock ($0.54 per share)
(13,708)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
Cash flow from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion
2,200
1,960
Unrealized (gains) losses recognized on equity securities
(233)
187
Loss (gain) on sale of foreclosed real estate
85
(547)
Write-down of foreclosed real estate
391
240
Gain on sale of residential real estate loans
(1,925)
Origination of SBA loans held for sale
(58,928)
(73,038)
Proceeds from sales of SBA loans held for sale
56,464
76,305
(2,134)
(3,267)
Increase in cash value of bank owned life insurance
(1,713)
(1,332)
Increase in accrued interest receivable
(542)
(1,441)
Increase in SBA and USDA servicing rights
(58)
(22)
(Increase) Decrease in mortgage servicing rights
(23)
2,150
Decrease in other assets
1,809
462
(Decrease) increase in accrued interest payable
(540)
1,176
(Decrease) increase in other liabilities
(999)
46,503
Net cash flow provided by operating activities
44,230
90,401
Cash flow from investing activities:
Proceeds from maturities, calls or paydowns of securities available for sale
503
943
Purchase of Federal Home Loan Bank stock
(2,405)
(353)
Proceeds from sales of residential real estate loans
189,414
(Increase) decrease in loans, net
(111,541)
25,077
Purchases of premises and equipment
(877)
(3,988)
Proceeds from sales of foreclosed real estate owned
136
4,109
Net cash flow provided by investing activities
75,230
25,788
Cash flow from financing activities:
Dividends paid on common stock
(15,225)
(13,661)
Repurchases of common stock
(Decrease) increase in deposits, net
(7,816)
51,750
Decrease in other borrowings, net
(392)
Proceeds from Federal Home Loan Bank advances
450,000
275,000
Repayments of Federal Home Loan Bank advances
(400,000)
(325,000)
Net cash flow provided (used) by financing activities
26,949
(13,617)
Continued to following page.
Net change in cash and cash equivalents
146,409
102,572
Cash and cash equivalents at beginning of period
179,485
Cash and cash equivalents at end of period
282,057
Supplemental schedule of noncash investing and financing activities:
Transfer of residential real estate loans to loans held for sale
165,222
Transfer of loan principal to foreclosed real estate, net of write-downs
661
235
Supplemental disclosures of cash flow information - Cash paid during the year for:
Interest
72,753
65,623
Income taxes
16,556
13,765
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
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 nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2023.
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2023, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “Company’s 2023 Form 10-K”). There were no new accounting policies or changes to existing policies adopted during the first nine months of 2024 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 September 30, 2024. Although the ultimate outcome of all claims and lawsuits outstanding as of September 30, 2024 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 Disclosure Rules
In March 2024, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. The disclosure requirements will apply to the Company's fiscal year beginning January 1, 2026. The Company is currently evaluating the final rule to determine its impact on the Company's disclosures.
The Company has evaluated the Accounting Standards Updates issued during 2024 to date but does not expect those updates to have a material impact on the consolidated financial statements.
Accounting Standards Adopted in 2023
In January 2023, the Company adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the incurred loss approach with an expected loss model, referred to as the current expected credit loss (“CECL”) model. The new standard applied to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. ASU 2016-13 simplified the accounting for purchased credit-impaired debt securities and loans and expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses. In addition, under the new standard, entities are required to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 was effective for interim and annual reporting periods beginning after December 15, 2022. With its adoption, ASU 2016-13 provided for a modified retrospective transition by means of a cumulative effect adjustment to equity as of the beginning of the period in which the guidance was effective.
The Company adopted ASU 2016-13 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach. The adoption of this standard resulted in an increase to the allowance for credit losses on loans of $5.1 million and the creation of an allowance for unfunded commitments of $239,000. These one-time cumulative adjustments resulted in a $3.8 million decrease to retained earnings, net of a $1.5 million increase to deferred tax assets.
For available for sale (“AFS”) securities, the new CECL methodology replaced the other-than-temporary impairment model and required the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline was determined to be other-than-temporary. There was no financial impact related to this implementation since the credit risk associated with our securities portfolio was minimal. The Company has made a policy election to exclude accrued interest from the amortized cost basis of AFS securities.
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio or are considered collateral dependent. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics. See Note 3 below for further details.
The following new accounting policies were adopted during 2023:
Allowance for Credit Losses – Available for Sale Securities
The impairment model for available for sale (“AFS”) securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASU 2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any
10
changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. As of September 30, 2024, the Company determined that the unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note 2 below for further details.
Allowance for Credit Losses - Loans
Under the CECL model, the allowance for credit losses (“ACL”) on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.
The Company estimates the ACL on loans based on the underlying loans’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.
Expected credit losses are reflected in the allowance for credit losses through a charge to provision for credit losses. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Loans are charged off against the ACL when management believes the collection of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the ACL when received.
The Company measures expected credit losses of loans on a collective (pool) basis, when the loans share similar risk characteristics. Depending on the nature of the pool of loans with similar risk characteristics, the Company uses the discounted cash flow (“DCF”) method and a qualitative approach as discussed further below.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for loan-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the loans that are reasonable and supportable, to the identified pools of loans with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to historical loss information on a straight-line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.
The Company has identified the following pools of loans with similar risk characteristics for measuring expected credit losses:
Construction and development – Loans in this segment primarily include real estate development loans for which payment is derived from the sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial real estate – Loans in this segment are primarily income-producing properties. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans. This loan segment includes farmland loans.
11
Commercial and industrial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased customer spending, will have an effect on the credit quality in this segment.
Single family residential mortgages – Loans in this segment include loans for residential real estate. Loans in this segment are dependent on credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality of this segment.
Consumer and other – Loans in this segment are made to individuals and are secured by personal assets, as well as loans for personal lines of credit and overdraft protection. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality in this segment.
Discounted Cash Flow Method
The Company uses the discounted cash flow method to estimate expected credit losses for each of its loan segments. The Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on benchmark peer data.
The Company uses regression analysis of peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, the Company uses national data including gross domestic product, unemployment rates and home price indices (residential mortgage loans only) depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.
Qualitative Factors
The Company also considers qualitative adjustments to the quantitative baseline discussed above. For example, the Company considers the impact of current environmental factors at the reporting date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), changes in underwriting standards, changes in collateral value, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.
Individually Analyzed Loans
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral,
12
expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.
Allowance for Unfunded Commitments
The Company records an allowance for credit losses on unfunded loan commitments, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s Consolidated Statements of Income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur. The allowance for unfunded commitments totaled $216,000 and $315,000 as of September 30, 2024 and December 31, 2023, respectively, and is included in Other Liabilities on the Company’s Consolidated Balance Sheets.
NOTE 2 – INVESTMENT SECURITIES
The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale as of September 30, 2024 and December 31, 2023 are summarized as follows:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Obligations of U.S. Government entities and agencies
4,511
States and political subdivisions
8,035
(1,209)
6,826
Mortgage-backed GSE residential
8,281
(1,412)
6,869
20,827
(2,621)
December 31, 2023
4,637
8,072
(1,290)
6,782
8,669
(1,595)
7,074
21,378
(2,885)
The amortized costs and estimated fair values of investment securities available for sale at September 30, 2024 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
376
375
Due after one year but less than five years
5,375
5,364
Due after five years but less than ten years
Due in more than ten years
6,795
5,598
13
Accrued interest receivable for securities available for sale totaled $77,000 and $115,000 as of September 30, 2024 and December 31, 2023, respectively. This accrued interest receivable is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.
As of September 30, 2024 and December 31, 2023, the Company had securities pledged to the Federal Reserve Bank Discount Window with a carrying amount of $13.7 million and $13.9 million, respectively. There were no securities sold during the three or nine months ended September 30, 2024 and 2023.
Information pertaining to securities with gross unrealized losses at September 30, 2024 and December 31, 2023 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
1,209
1,412
6,867
2,621
13,693
1,290
1,595
2,885
13,856
At September 30, 2024, the nineteen securities available for sale (11 municipal securities and 8 mortgage-backed securities) with an unrealized loss have depreciated 16.07% from the Company’s amortized cost basis. All of these securities have been in a loss position for greater than twelve months.
The Company does not believe that the securities available for sale that were in an unrealized loss position as of September 30, 2024 represent a credit loss impairment. As of September 30, 2024, there have been no payment defaults nor do we currently expect any future payment defaults. Furthermore, the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.
Equity Securities
As of September 30, 2024 and December 31, 2023, the Company had equity securities with carrying values totaling $10.6 million and $10.3 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 months ended September 30, 2024 and 2023, we recognized an unrealized gain of $292,000 and an unrealized loss of $245,000, respectively, in net income on our equity securities. During the nine months ended September 30, 2024 and 2023, we recognized an unrealized gain of $233,000 and an unrealized loss of $187,000, respectively, in net income on our equity securities. These unrealized gains and losses are recorded in Other Income on the Consolidated Statements of Income.
14
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans at September 30, 2024 and December 31, 2023 are summarized as follows:
Construction and development
16,539
23,262
Commercial real estate
738,929
711,177
Commercial and industrial
63,606
65,904
Residential real estate
2,276,210
2,350,299
Consumer and other
215
319
Total loans receivable
3,095,499
3,150,961
Unearned income
(7,673)
(8,856)
Allowance for credit losses
(18,589)
(18,112)
Loans, net
The Company is not committed to lend additional funds to borrowers with nonaccrual 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. Commercial loan participations are sold as needed 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.
The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this note. As of September 30, 2024 and December 31, 2023, accrued interest receivable for loans totaled $15.6 million and $15.0 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.
Allowance for Credit Losses
As previously mentioned in Note 1, the Company’s January 1, 2023 adoption of ASU 2016-13 resulted in a significant change to our methodology for estimating the allowance for credit losses since December 31, 2022. As a result of this adoption, the Company recorded a $5.1 million increase to the allowance for credit losses as a cumulative-effect adjustment on January 1, 2023.
A summary of changes in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2024 and 2023 is as follows:
Three Months Ended September 30, 2024
Construction
and
Commercial
Residential
Consumer
Development
Real Estate
and Industrial
and Other
Allowance for credit losses:
Beginning balance
25
7,018
698
10,217
17,960
Charge-offs
(28)
Recoveries
(13)
177
517
Ending balance
7,195
1,191
10,189
18,589
15
Three Months Ended September 30, 2023
30
6,208
11,199
18,091
(3)
(400)
(435)
27
6,196
634
10,799
17,660
Nine Months Ended September 30, 2024
46
6,876
588
10,597
18,112
83
91
(34)
236
623
(408)
Nine Months Ended September 30, 2023
124
2,811
1,326
9,626
13,888
Impact of adopting ASU 2016-13
(79)
3,275
(307)
2,166
5,055
(231)
(221)
(452)
18
22
(18)
337
(182)
(993)
Collateral-Dependent Loans
Collateral-dependent loans are loans for which foreclosure is probable or loans for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The estimated credit losses for these loans are based on the collateral’s fair value, less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value, less selling costs, at the time of foreclosure. As of September 30, 2024, there were $13.6 million, $3.1 million and $500,000 of collateral-dependent loans which were secured by residential real estate, commercial real estate and equipment, respectively. As of December 31, 2023, there were $11.9 million, $2.8 million and $4,000 of collateral-dependent loans which were secured by residential real estate, commercial real estate and equipment, respectively. The allowance for credit losses allocated to these loans as of September 30, 2024 and December 31, 2023 was $533,000 and $282,000, respectively.
16
Past Due and Nonaccrual Loans
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.
The following summarizes the Company’s past due and nonaccrual loans, by portfolio segment, as of September 30, 2024 and December 31, 2023:
Accruing
Greater than
Financing
Current
30-59 Days
60-89 Days
90 Days
Past Due
Nonaccrual
Receivables
16,326
732,523
2,804
537
735,864
62,852
356
189
63,397
2,251,833
6,601
13,590
2,272,024
3,063,749
9,761
14,316
3,087,826
22,568
548
23,116
702,564
3,752
1,005
4,757
991
708,312
64,103
112
101
213
1,286
65,602
2,315,285
15,073
2,541
17,614
11,857
2,344,756
3,104,839
18,937
3,647
22,584
14,682
3,142,105
The following table presents an analysis of nonaccrual loans with and without a related allowance for credit losses as of September 30, 2024 and December 31, 2023:
Loans With a
Loans Without a
Related ACL
Nonaccrual Loans
234
303
185
419
13,897
757
14,448
17
All payments received while a loan is on nonaccrual status are applied against the principal balance of the loan. The Company does not recognize interest income while loans are on nonaccrual status.
Credit Quality Indicators
The Company utilizes a ten grade loan risk 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 tables present the loan portfolio's amortized cost by loan type, risk rating and year of origination as of September 30, 2024 and December 31, 2023. There were no loans with a risk rating of Doubtful or Loss at September 30, 2024 and December 31, 2023.
Term Loan by Origination Year
Revolving
2022
2021
2020
Prior
Loans
Total Loans
Pass
6,080
2,568
5,556
179
1,164
231
15,778
Special Mention
Substandard
Total construction and development
727
84,643
152,363
201,589
98,815
74,174
112,233
3,280
727,097
1,890
575
6,068
6,877
Total commercial real estate
202,164
76,298
118,301
4,638
17,674
10,925
4,022
2,847
3,407
17,557
61,070
1,207
349
195
227
1,120
Total commercial and industrial
11,274
4,217
3,196
4,841
Commercial and industrial:
Current period gross write offs
28
243,721
172,655
655,659
762,799
255,847
165,565
2,256,246
955
1,060
3,176
2,035
8,552
Total residential real estate
173,610
656,719
765,975
257,882
174,117
Total consumer and other
Total loans
339,297
346,215
875,713
869,734
338,540
297,490
20,837
19
2019
7,715
13,273
134
1,187
259
682
157,572
197,590
104,480
80,124
34,147
115,147
4,240
693,300
590
233
7,681
4,583
13,087
198,180
82,282
41,828
119,730
Commercial real estate:
224
455
16,411
13,324
4,595
3,192
2,353
3,141
19,315
62,331
211
1,201
1,282
352
205
20
1,859
5,877
3,544
2,769
4,362
142
79
88
309
300,773
717,527
833,840
284,535
60,356
134,859
2,331,890
357
1,421
2,474
1,382
7,232
12,866
717,884
835,261
287,009
61,738
142,091
482,790
942,661
946,300
374,022
106,335
266,442
23,555
During the nine months ended September 30, 2024, four construction and development revolving loans totaling $16.3 million were converted to commercial real estate term loans. During the year ended December 31, 2023, five construction and development revolving loans totaling $30.1 million were converted to commercial real estate term loans.
Loan Modifications to Borrowers Experiencing Financial Difficulty.
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics.
Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, payment deferrals, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.
The following tables present the amortized cost basis of loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023.
% of Total
Term
Payment
Rate
Three and Nine Months Ended September 30, 2024
Extension
Delay
Reduction
Receivable
0
%
12,928
1.76
497
0.78
13,425
0.43
Three and Nine Months Ended September 30, 2023
12,400
1.99
0.00
0.41
The following tables present the financial effect of the loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023.
Weighted/Average
Months of
Interest Rate
Term Extension
Deferral
245
3.60
There was one commercial and industrial loan modification totaling $147,000 made to a borrower experiencing financial difficulty that defaulted during the three and nine months ended September 30, 2024. There were no loan modifications made to borrowers experiencing financial difficulty defaulted during the three and nine months ended September 30, 2023. There were no charge-offs of previously modified loans were recorded during the three and nine months ended September 30, 2024 and 2023.
21
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 September 30, 2024 and December 31, 2023, the unpaid principal balances of serviced loans totaled $487.4 million and $508.0 million, respectively.
Activity for SBA and USDA loan servicing rights are as follows:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
Beginning of period
7,108
8,018
7,038
Change in fair value
201
(911)
58
69
End of period, fair value
7,107
Fair value at September 30, 2024 and December 31, 2023 was determined using discount rates ranging from 5.95% to 10.88% and 8.66% to 14.73%, respectively, and prepayment speeds ranging from 8.99% to 21.65% and 7.29% to 20.23%, respectively, depending on the stratification of the specific right. Average default rates are based on the industry average for the applicable NAICS/SIC code.
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 September 30, 2024 and December 31, 2023 was $556.4 million and $443.1 million, respectively.
Activity for mortgage loan servicing rights and the related valuation allowance are as follows:
Mortgage loan servicing rights:
1,454
2,514
3,973
Additions
310
1,232
Amortization expense
(216)
(691)
(957)
(2,150)
Valuation allowance
(252)
End of period, carrying value
1,823
Valuation allowance:
Additions expensed
Reductions credited to operations
Direct write-downs
The fair value of servicing rights was $6.6 million and $6.3 million at September 30, 2024 and December 31, 2023, respectively. Fair value at September 30, 2024 was determined by using a discount rate of 13.08%, prepayment speeds of 19.92%, and a weighted average default rate of 1.50%. Fair value at December 31, 2023 was determined by using a discount rate of 13.04%, prepayment speeds of 16.16%, and a weighted average default rate of 1.49%.
NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES & OTHER BORROWINGS
Advances from the Federal Home Loan Bank (“FHLB”) at September 30, 2024 and December 31, 2023 are summarized as follows:
Convertible advance maturing February 13, 2026; fixed rate of 4.184%
50,000
Convertible advance maturing April 22, 2027; fixed rate of 4.174%
25,000
Convertible advance maturing April 23, 2027; fixed rate of 4.177%
Convertible advance maturing April 26, 2027; fixed rate of 4.193%
Convertible advance maturing May 7, 2027; fixed rate of 4.089%
100,000
Convertible advance maturing May 13, 2027; fixed rate of 4.099%
Convertible advance maturing May 14, 2027; fixed rate of 4.10%
75,000
Convertible advance maturing June 24, 2027; fixed rate of 3.993%
Convertible advance maturing January 25, 2028; fixed rate of 3.243%
Convertible advance maturing February 14, 2028; fixed rate of 3.625%
Convertible advance maturing June 23, 2028; fixed rate of 3.655%
Convertible advance maturing November 8, 2028; fixed rate of 3.607%
Convertible advance maturing November 8, 2028; fixed rate of 3.745%
Convertible advance maturing November 14, 2028; fixed rate of 3.519%
Total FHLB advances
The FHLB advances outstanding at September 30, 2024 all have a conversion feature that allows the FHLB to call the advances every three months. At September 30, 2024 and December 31, 2023, the Company had a line of credit with the FHLB, set as a percentage of total assets, with maximum borrowing capacity of $1.08 billion and $1.05 billion, respectively. The available borrowing amounts are collateralized by the Company’s FHLB stock and pledged residential real estate loans, which totaled $2.26 billion and $2.32 billion at September 30, 2024 and December 31, 2023, respectively.
At September 30, 2024, 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 September 30, 2024.
At September 30, 2024 and December 31, 2023, the Company had Federal Reserve Discount Window funds available of approximately $532.2 million and $446.3 million. The funds are collateralized by a pool of construction and development, commercial real estate and commercial and industrial loans with carrying balances totaling $631.1 million and $604.0 million as of September 30, 2024 and December 31, 2023, respectively, as well as all of the Company’s municipal and mortgage backed securities. There were no outstanding borrowings on this line as of September 30, 2024.
NOTE 7 – OPERATING LEASES
The Company has entered into various operating leases for certain branch locations with terms extending through October 2033. 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 include options to terminate the lease and none have 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
23
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 nine months ended September 30, 2024 and 2023 were as follows:
Three Months Ended September 30,
Operating lease cost
539
532
1,633
1,441
Variable lease cost
49
42
147
130
Short-term lease cost
Sublease income
Total net lease cost
574
1,780
1,571
Future maturities of the Company’s operating lease liabilities are summarized as follows:
Twelve Months Ended:
Lease Liability
September 30, 2025
1,920
September 30, 2026
1,665
September 30, 2027
1,419
September 30, 2028
1,100
September 30, 2029
591
After September 30, 2029
1,383
Total lease payments
8,078
Less: interest discount
(783)
Present value of lease liabilities
Supplemental Lease Information
Weighted-average remaining lease term (years)
5.6
Weighted-average discount rate
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (cash payments)
1,564
1,538
Operating cash flows from operating leases (lease liability reduction)
1,356
1,345
Operating lease right-of-use assets obtained in exchange for leases entered into during the period
NOTE 8 – INTEREST RATE DERIVATIVES
During 2021 and 2022, the Company entered into fourteen separate interest rate swap agreements with notional amounts totaling $800.0 million. Six of the interest rate swaps are two-year forward three-year term swaps (five-year total term) where cash settlements began 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 began 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 began in May 2023 or July 2023. The two remaining interest rate swaps are 3-year spot swaps where cash settlements began in June 2022 and December 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 $17.7 million and $29.7 million and an unrealized loss of $589,000 and $476,000 at September 30, 2024 and December 31, 2023, respectively. These unrealized gains and losses are recorded in Interest Rate Derivatives and Other Liabilities on the Consolidated Balance Sheets. The Company expects the hedges to remain highly effective during the remaining terms of the swaps.
24
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 began in 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 $1.2 million and $2.1 million at September 30, 2024 and December 31, 2023, respectively, and are recorded in Interest Rate Derivatives 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 September 30, 2024, there were no cash deposits pledged as collateral by the Company. At September 30, 2024, the Company had $17.4 million of restricted cash obtained from the counterparties as collateral for the significant unrealized gains on our interest rate derivatives.
Summary information for the interest rate swaps designated as cash flow hedges is as follows:
As of or for the
Year Ended
Notional Amounts
800,000
Weighted-average pay rate
2.28%
Weighted-average receive rate
5.31%
5.03%
Weighted-average maturity
4.2 years
Weighted-average remaining maturity
1.6 years
2.4 years
16,017
5,246
Summary information for the interest rate caps designated as cash flow hedges is as follows:
Rate Cap Premiums
257
350
Cap Rate
2.50%
5.0 years
2.1 years
2.8 years
975
139
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 September 30, 2024 and December 31, 2023 include:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
58,459
68,083
Standby letters of credit
4,184
4,908
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 $58.5 million of unused lines of credit and $4.2 million for standby letters of credit as of September 30, 2024. 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.
26
The following presents the assets and liabilities as of September 30, 2024 and December 31, 2023 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
13,695
54,978
32,590
11,820
Nonrecurring fair value measurements:
Collateral-dependent loans
1,525
854
(377)
2,379
(376)
Liabilities
Interest rate swaps
589
67,860
45,637
11,888
1,526
(148)
(239)
2,052
(387)
476
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 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.
Collateral-dependent loans: Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. Fair value for both collateral-dependent loans are measured based on the value of the collateral securing these loans and are 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.
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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 nine months ended September 30, 2024 and 2023:
Obligations of
SBA and USDA
U.S. Government
Servicing
Interest Only
Entities and Agencies
Asset
Strip
Fair value, July 1, 2024
4,554
Total gains included in income
Settlements
Prepayments/paydowns
(43)
Transfers in and/or out of Level 3
Fair value, September 30, 2024
Fair value, July 1, 2023
4,790
Total losses included in income
(112)
Fair value, September 30, 2023
4,678
Fair value, January 1, 2024
(126)
Fair value, January 1, 2023
5,059
47
Total gains/(losses) included in income
(47)
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 September 30, 2024 and December 31, 2023:
Valuation
Unobservable
General
Technique
Input
Range
September 30, 2024:
Recurring:
Discounted cash flows
Discount rate
4%-6%
Prepayment speed
8.99%-21.65%
5.95%-10.88%
Nonrecurring:
Appraised value less estimated selling costs
Estimated selling costs
6%
Foreclosed real estate
December 31, 2023:
7.29%-20.23%
8.66%-14.73%
The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2024 and December 31, 2023 are as follows:
Carrying
Estimated Fair Value at September 30, 2024
Financial Assets:
Cash, due from banks, and federal funds sold
Investment securities
28,774
FHLB stock
N/A
2,990,665
59
15,608
Mortgage servicing asset
6,594
Financial Liabilities:
2,724,209
381,600
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Estimated Fair Value at December 31, 2023
28,828
2,982,789
15,024
6,344
2,729,024
322,075
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. Under the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“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 September 30, 2024 the Company and Bank meet 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 September 30, 2024 and December 31, 2023, 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.
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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 September 30, 2024 and December 31, 2023. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of September 30, 2024 and December 31, 2023.
To Be Well Capitalized
Minimum Capital Required -
Under Prompt Corrective
Actual
Basel III
Action Provisions:
Ratio
Amount ≥
Ratio ≥
As of September 30, 2024:
Total Capital (to Risk Weighted Assets)
Consolidated
414,881
20.03
217,488
10.5
Bank
413,027
19.94
217,482
207,126
10.0
Tier I Capital (to Risk Weighted Assets)
396,076
19.12
176,062
8.5
394,222
19.03
176,057
165,701
8.0
Common Tier 1 (CET1)
144,992
7.0
144,988
134,632
6.5
Tier 1 Capital (to Average Assets)
11.12
142,497
4.0
11.07
142,475
178,094
5.0
As of December 31, 2023:
372,482
17.60
222,188
370,459
17.51
222,181
211,601
354,055
16.73
179,867
352,032
16.64
179,861
169,281
148,125
148,121
137,541
10.20
138,790
10.15
138,763
173,454
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
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2018 Incentive Plan, and the terms of those awards, will be made by the Committee. At September 30, 2024, 240,000 stock options had been granted and 878,901 shares of restricted stock had been issued under the 2018 Incentive Plan.
Stock Options
A summary of stock option activity for the nine months ended September 30, 2024 is presented below:
Weighted
Average
Exercise Price
Outstanding at January 1, 2024
240,000
12.70
Granted
Exercised
Forfeited
Outstanding at September 30, 2024
The Company recognized no compensation expense for stock options during the three and nine months ended September 30, 2024 and 2023. As of September 30, 2024 and December 31, 2023, 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 nine months ended September 30, 2024 is presented below:
Weighted-
Average Grant-
Nonvested Shares
Date Fair Value
Nonvested at January 1, 2024
230,221
17.71
104,464
24.65
Vested
(126,820)
19.33
Nonvested at September 30, 2024
207,865
20.20
During the three months ended September 30, 2024 and 2023, the Company recognized compensation expense for restricted stock of $837,000 and $825,000, respectively. During the nine months ended September 30, 2024 and 2023, the Company recognized compensation expense for restricted stock of $1.8 million and $1.6 million, respectively. As of September 30, 2024 and December 31, 2023, there was $3.8 million and $3.0 million, respectively, of total unrecognized compensation cost related to nonvested shares granted under the 2018 Incentive Plan. As of September 30, 2024, the cost is expected to be recognized over a weighted-average period of 2.2 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
25,274,665
25,261,347
25,203,114
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
342,942
317,209
329,725
307,575
Average shares and dilutive potential common shares
25,674,858
25,591,874
25,591,072
25,510,689
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 nine months ended September 30, 2024 and 2023.
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, 2023 through September 30, 2024 and on our results of operations for the three and nine months ended September 30, 2024 and 2023. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2023 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. 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:
37
38
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.
CECL Adoption
On January 1, 2023, the Company adopted ASC Topic 326 which replaces the incurred loss approach for measuring credit losses with an expected loss model, referred to the current expected credit loss ("CECL") model. CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The adoption of this guidance resulted in an increase of the allowance for credit losses of $5.1 million, the creation of an
39
allowance for unfunded commitments of $239,000 and a reduction of retained earnings of $3.8 million, net of the increase in deferred tax assets of $1.5 million.
The impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the provision for credit losses, and therefore, greater volatility to our reported earnings. See Note 1 and Note 3 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information on the allowance for credit losses and the allowance for unfunded commitments.
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 credit 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, 2023 in the Company’s 2023 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2023.
Reserve for Credit Losses
A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers.
The reserve for credit losses consists of the allowance for credit losses (“ACL”) and the allowance for unfunded commitments. As a result of our January 1, 2023 adoption of ASU No. 2016-13, and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2022. The standard replaced the “incurred loss” approach with an “expected loss” approach known as the Current Expected Credit Losses (“CECL”). The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”
The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for loan-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. The allowance for unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit. This allowance is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur.
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Management’s evaluation of the appropriateness of the reserve for credit losses is often the most critical of accounting estimates for a financial institution. Our determination of the amount of the reserve for credit losses is a critical accounting estimate as it requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows, reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The reserve for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), changes in underwriting standards, changes in collateral values, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.
See Note 1 and Note 3 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information on the reserve and allowance for credit losses.
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 20 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. As of September 30, 2024, we had total assets of $3.57 billion, total loans of $3.09 billion, total deposits of $2.72 billion and total shareholders’ equity of $407.2 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 nine months ended September 30, 2024 and 2023. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2.
As of or for the Three Months Ended
As of or for the Nine Months Ended
June 30,
March 31,
Selected income statement data:
Interest income
54,108
52,358
50,671
Interest expense
23,396
25,273
24,549
30,712
27,085
26,122
(128)
(140)
782
Noninterest income
5,559
5,568
4,712
Noninterest expense
13,032
12,361
13,915
Income tax expense
6,430
5,801
16,937
14,631
11,347
Per share data:
Basic income per share
0.67
0.58
Diluted income per share
0.57
0.44
Dividends per share
0.20
0.18
0.60
0.54
Book value per share (at period end)
16.07
16.08
15.73
15.14
15.24
Shares of common stock outstanding
Weighted average diluted shares
25,568,333
25,548,089
25,543,861
Performance ratios:
Return on average assets
1.86
1.65
1.29
1.30
1.80
1.57
Return on average equity(1)
16.26
17.10
15.41
11.71
12.14
16.27
14.96
Dividend payout ratio
30.58
30.03
34.77
40.36
40.18
31.66
34.04
Yield on total loans
6.43
6.46
6.34
6.11
5.98
6.41
5.93
Yield on average earning assets
6.36
6.45
6.27
6.14
5.92
5.88
Cost of average interest bearing liabilities
3.69
3.68
3.94
3.91
3.97
3.77
3.67
Cost of deposits
3.61
3.63
3.95
4.05
3.74
3.81
Net interest margin
3.58
3.66
3.24
3.17
2.94
3.50
3.11
Efficiency ratio(2)
37.01
35.93
37.86
45.13
43.04
36.90
38.18
Asset quality data (at period end):
Net charge-offs/(recoveries) to average loans held for investment
(0.01)
(0.00)
0.04
0.02
43
Nonperforming assets to gross loans and OREO
0.51
0.47
0.52
ACL to nonperforming loans
129.85
138.11
135.23
123.36
116.74
ACL to loans held for investment
Balance sheet and capital ratios:
Gross loans held for investment to deposits
113.67
112.85
110.97
115.38
111.77
Noninterest bearing deposits to deposits
20.29
20.54
19.43
18.75
20.58
Investment securities to assets
0.81
0.82
0.79
Common equity to assets
11.41
11.26
10.87
10.89
10.96
Leverage ratio
10.75
10.27
10.07
Common equity tier 1 ratio
18.25
16.96
17.03
Tier 1 risk-based capital ratio
Total risk-based capital ratio
17.81
17.91
Mortgage and SBA loan data:
Mortgage loans serviced for others
556,442
529,823
443,905
443,072
464,823
Mortgage loan production
122,355
94,056
94,016
128,931
91,891
310,427
208,056
Mortgage loan sales
54,193
111,424
21,873
187,490
SBA loans serviced for others
487,359
486,051
516,425
508,000
487,827
SBA loan production
35,839
8,297
11,397
27,529
18,212
55,533
55,561
SBA loan sales
28,858
24,065
5,169
52,923
71,925
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Results of Operations
We recorded net income of $16.7 million for the three months ended September 30, 2024 compared to $11.4 million for the same period in 2023, an increase of $5.3 million, or 46.1%. This increase was due to an increase in net interest income of $6.1 million and an increase in noninterest income of $4.0 million, offset by an increase in noninterest expense of $2.1 million, an increase in income tax expense of $1.7 million and an increase in provision for credit losses of $963,000.
For the nine months ended September 30, 2024, we recorded net income of $48.3 million compared to $40.3 million for the nine months ended September 30, 2023, an increase of $8.0 million, or 19.9%. This increase was due to an increase in net interest income of $12.7 million and an increase in noninterest income of $4.3 million, offset by an increase in noninterest expense of $5.2 million, an increase income tax expense of $2.6 million and an increase in provision for credit losses of $1.1 million.
Basic and diluted earnings per common share for the three months ended September 30, 2024 was $0.66 and $0.65, respectively, compared to $0.45 for both the basic and diluted earnings per common share for the same period in 2023. For the nine months ended September 30, 2024, basic and diluted earnings per common share was $1.91 and $1.89, respectively, compared to $1.60 and $1.58 for the same period in 2023, respectively.
Interest Income
Interest income totaled $53.8 million for the three months ended September 30, 2024, an increase of $5.1 million, or 10.5%, from the three months ended September 30, 2023, primarily due to a 45 basis points increase in the loan yield coupled with an $86.2 million increase in average loan balances, as well as a 38 basis points increase in the total investment yield coupled with a $19.7 million increase in the average total investment balance. The increase in average loans is due to an increase of $93.5 million in average commercial real estate loans, an increase of $6.1 million in average residential mortgage loans and an increase of $2.8 million in average commercial and industrial loans, offset by a decrease of $16.4 million in construction and development loans. As compared to the three months ended September 30, 2023, the yield on average interest-earning assets increased by 44 basis points to 6.36% from 5.92% with the yield on average loans increasing by 45 basis points and the yield on average total investments increasing by 38 basis points.
Interest income was $160.3 million for the nine months ended September 30, 2024 compared to $142.2 million for the same period in 2023, an increase of $18.1 million, or 12.8%, primarily due to a 48 basis point increase in the loan yield coupled with an increase in average loan balances of $112.5 million, as well as a 58 basis points increase in the interest earning cash accounts yield coupled with a $20.0 million increase in the average interest earning cash balances. The increase in average loans is due to an increase of $73.9 million in average commercial real estate loans, a $44.5 million increase in average residential mortgage loans and an increase of $13.8 million in average commercial and industrial loans, offset by a decrease of $19.8 million in construction and development loans. As compared to the nine months ended September 30, 2023, the yield on average interest-earning assets increased by 48 basis points to 6.36% from 5.88% with the yield on average loans increasing by 48 basis points and the yield on average total investments increasing by 58 basis points.
Interest Expense
Interest expense for the three months ended September 30, 2024 decreased $1.0 million, or 4.1%, to $23.5 million compared to interest expense of $24.6 million for the three months ended September 30, 2023, primarily due to a 44 basis points decrease in deposit costs, offset by a $31.8 million increase in average deposit balances. The 44 basis points decrease in deposit costs was primarily driven by a 199 basis points decrease in the yield on average money market deposits from the benefit received on our interest rate swaps, offset by an 81 basis point increase in time deposit costs. Average time deposits increased by $91.5 million while average money market deposits decreased by $54.4 million. Average borrowings for the three months ended September 30, 2024 increased by $50.7 million with an increase in rate of 73 basis points compared to the three months ended September 30, 2023.
Interest expense totaled $72.2 million for the nine months ended September 30, 2024, an increase of $5.4 million, or 8.1%, compared to the same period in 2023, primarily due to a $128.4 million increase in average interest-bearing deposits
45
and a 108 basis points increase in borrowing costs, partially offset by a seven basis points decrease in deposit costs. Average borrowings for the nine months ended September 30, 2024 decreased by $3.1 million compared to the same period in 2023.
The Company currently has interest rate derivative agreements totaling $850.0 million that are designated as cash flow hedges of our deposit accounts indexed to the Federal Funds Effective rate. The weighted average pay rate for these interest rate derivatives is 2.29%. During the three months ended September 30, 2024, we recorded a credit to interest expense of $6.4 million from the benefit received on these interest rate derivatives compared to a credit to interest expense of $1.3 million recorded during the three months ended September 30, 2023. During the nine months ended September 30, 2024, we recorded a credit to interest expense of $17.0 million from the benefit received on these interest rate derivatives compared to a credit to interest expense of $2.3 million recorded during the nine months ended September 30, 2023. Based on the Federal Funds Effective rate as of September 30, 2024 (4.83%), the Company would estimate to record a credit to interest expense of approximately $5.4 million for the remainder of 2024 from the benefit received on these interest rate derivatives. See Note 8 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information on these interest rate derivatives.
Net Interest Margin
The net interest margin for the three months ended September 30, 2024 increased by 64 basis points to 3.58% from 2.94% for the three months ended September 30, 2023, primarily due to a 44 basis points increase in the yield on average interest-earning assets of $3.37 billion and a 28 basis points decrease in the cost of average interest-bearing liabilities of $2.54 billion. Average earning assets for the three months ended September 30, 2024 increased by $105.9 million from the three months ended September 30, 2023, due to a $86.2 million increase in average loans and a $19.7 million increase in average total investments. Average interest-bearing liabilities for the three months ended September 30, 2024 increased by $82.4 million from the three months ended September 30, 2023, driven by increases in average borrowings of $50.7 million and average interest-bearing deposits of $31.8 million.
The net interest margin for the nine months ended September 30, 2024 increased by 39 basis points to 3.50% from 3.11% for the nine months ended September 30, 2023, primarily due to a 48 basis points increase in the yield on average interest-earning assets of $3.37 billion, offset by a 10 basis points increase in the cost of average interest-bearing liabilities of $2.56 billion. Average earning assets increased by $131.4 million due to a $112.5 million increase in average loans and a $20.0 million increase in average interest-earning cash accounts. Average interest-bearing liabilities increased by $125.3 million, primarily driven by an increase in average interest-bearing deposits of $128.4 million, offset by a $3.1 million decrease in average borrowings.
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 increase in our net interest margin is primarily the result of our decreasing deposit costs from the benefit received on our interest rate derivatives, as well as the continued increase to our loan yields.
Average Balances, Interest and Yields
The following tables present, for the three and nine months ended September 30, 2024 and 2023, 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 /
Balance
Fees
Earning Assets:
Federal funds sold and other investments(1)
220,826
3,308
5.96
200,245
2,807
5.56
31,309
2.40
32,172
207
2.55
Total investments
252,135
3,497
5.52
232,417
3,014
5.14
14,170
302
8.48
30,584
442
5.73
740,720
17,132
9.20
647,244
14,435
8.85
64,584
1,593
9.81
61,774
1,488
9.56
2,295,573
31,267
5.42
2,289,428
29,296
5.08
394
42.41
67.11
Gross loans(2)
3,115,441
3,029,231
Total earning assets
3,367,576
3,261,648
Noninterest-earning assets
207,093
214,834
3,574,669
3,476,482
Interest-bearing liabilities:
NOW and savings deposits
119,759
770
2.56
125,078
381
1.21
Money market deposits
982,517
6,156
2.49
1,036,955
11,709
4.48
Time deposits
1,057,956
12,676
4.77
966,408
9,646
3.96
Total interest-bearing deposits
2,160,232
2,128,441
Borrowings
375,677
4.17
325,025
3.44
Total interest-bearing liabilities
2,535,909
2,453,466
Noninterest-bearing liabilities:
Noninterest-bearing deposits
542,939
555,074
Other noninterest-bearing liabilities
87,156
94,528
Total noninterest-bearing liabilities
630,095
649,602
Shareholders' equity
408,665
373,414
Net interest spread
2.67
1.95
187,398
8,729
6.22
167,411
7,057
5.64
31,428
2.51
32,547
583
2.39
218,826
9,319
5.69
199,958
7,640
5.11
16,871
1,127
8.92
36,658
1,520
5.54
731,573
50,270
9.18
657,700
42,776
8.70
66,116
4,894
9.89
52,292
3,637
9.30
2,332,271
94,565
2,287,788
86,495
5.05
53.26
174
67.62
3,147,142
3,034,612
3,365,968
3,234,570
214,756
190,616
3,580,724
3,425,186
140,539
2,852
2.71
150,849
1,869
1.66
1,019,394
21,984
2.88
991,048
31,738
4.28
1,034,256
36,606
4.73
923,891
25,309
2,194,189
2,065,788
362,965
366,112
2,557,154
2,431,900
536,807
564,233
90,459
69,078
627,266
633,311
396,304
359,975
2.59
2.21
48
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 September 30, 2024 Compared to Three Months Ended September 30, 2023
Increase (Decrease) Due to Change in:
Volume
Yield/Rate
Total Change
Earning assets:
320
181
501
241
242
483
(292)
152
2,096
601
2,697
70
105
166
1,805
1,971
Consumer and Other
2,042
2,599
2,283
2,841
5,124
(52)
441
389
(518)
(5,035)
(5,553)
980
2,050
3,030
410
(2,544)
438
685
1,123
848
(1,859)
(1,011)
1,435
4,700
6,135
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
931
741
1,672
(163)
170
768
911
1,679
(916)
523
(393)
5,116
2,378
7,494
1,032
225
1,257
2,000
6,070
8,070
7,254
9,210
16,464
8,022
10,121
18,143
(224)
983
1,262
(11,016)
(9,754)
3,399
7,898
11,297
4,437
(1,911)
2,526
(68)
2,956
2,888
4,369
1,045
5,414
3,653
9,076
12,729
Provision for Credit Losses
The provision for credit losses reflects our internal calculation and judgment of the appropriate amount of the allowance for credit losses. The adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” or “CECL” has significantly changed the methodology of how we measure credit losses (see Note 1 to the Consolidated Financial Statements for more information). We maintain the allowance for credit losses at levels we believe are appropriate to cover our estimate of expected credit losses over the life of loans in the portfolio as of the end of the reporting period. The allowance for credit losses is determined through detailed quarterly analyses of our loan portfolio. The allowance for credit losses is based on our loss experience, changes in the economic environment, reasonable and supportable forecasts, as well as an ongoing assessment of credit quality and environmental factors not reflective in historical loss rates. Additional qualitative factors that are considered in determining the amount of the allowance for credit losses are concentrations of credit risk (geographic, large borrower, and industry), changes in underwriting standards, changes in collateral value, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.
We recorded a provision for credit losses of $582,000 and $314,000 during the three and nine months ended September 30, 2024 compared to a credit to the provision for credit losses of $381,000 and $797,000 during the three and nine months ended September 30, 2023. The provision expense recorded during the nine months ended September 30, 2024 was primarily due to the increase in reserves allocated to our individually analyzed loans, as well as the increase in general reserves allocated to our commercial real estate loan portfolio due to higher loan balances, partially offset by the decrease in the general reserves allocated to our residential mortgage loan portfolio as a large amount of residential mortgage loans were sold during the period. Our ACL as a percentage of gross loans for the periods ended September 30, 2024, December 31, 2023 and September 30, 2023 was 0.60%, 0.57% and 0.58%, respectively. Our ACL 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 credit loss ratios compared to other commercial or consumer loans due to their low LTVs.
See the section captioned “Allowance for Credit Losses” elsewhere in this document for further analysis of our provision for credit losses.
50
Noninterest Income
Noninterest income for the three months ended September 30, 2024 was $6.6 million, an increase of $4.0 million, or 149.0%, compared to $2.7 million for the three months ended September 30, 2023. Noninterest income for the nine months ended September 30, 2024 was $17.7 million, an increase of $4.3 million, or 31.5%, compared to $13.5 million for the nine months ended September 30, 2023.
The following table sets forth the major components of our noninterest income for the three and nine months ended September 30, 2024 and 2023:
$ Change
% Change
8.4
107
7.6
437
29.6
1,482
41.0
100.0
507
596.5
1,990
857.8
839
343.9
(1,133)
(34.7)
961
355.9
(185)
(5.3)
647
248.8
3.3
3,958
149.0
4,250
31.5
Service charges on deposit accounts increased $41,000, or 8.4%, to $531,000 for the three months ended September 30, 2024 compared to $490,000 for the same three months during 2023. Service charges on deposit accounts were $1.5 million for the nine months ended September 30, 2024 compared to $1.4 million for the same period in 2023, an increase of $107,000, or 7.6%. These increases were primarily attributable to higher overdraft fees and wire transfer fees, offset by lower analysis charges.
Other service charges, commissions and fees increased $437,000, or 29.6%, to $1.9 million for the three months ended September 30, 2024 compared to $1.5 million for the three months ended September 30, 2023. Other service charges, commissions and fees increased $1.5 million, or 41.0%, to $5.1 million for the nine months ended September 30, 2024 compared to $3.6 million for the nine months ended September 30, 2023. These increases were mainly attributable to higher origination, underwriting and processing fees earned from our origination of residential mortgage loans as mortgage volume increased during the three and nine months ended September 30, 2024 compared to the same periods in 2023. Mortgage loan originations totaled $122.4 million and $310.4 million during the three and nine months ended September 30, 2024 compared to $91.9 million and $208.1 million during the same periods in 2023.
Total gain on sale of loans was $1.6 million for the three months ended September 30, 2024 compared to $244,000 for the same period of 2023, an increase of $1.4 million, or 559.4%. Total gain on sale of loans was $4.1 million for the nine months ended September 30, 2024 compared to $3.3 million for the same period of 2023, an increase of $792,000, or 24.2%.
Gain on sale of residential mortgage loans totaled $526,000 and $1.9 million for the three and nine months ended September 30, 2024 as we sold $54.2 million and $187.5 million in residential mortgage loans during these periods with an average premium of 1.05%. We recorded no gain on sale of residential mortgage loans during the three and nine months ended September 30, 2023 as no mortgage loans were sold during the period.
Gain on sale of SBA loans totaled $1.1 million and $2.1 million for the three and nine months ended September 30, 2024 compared to $244,000 and $3.3 million for the same periods in 2023. We sold $28.9 million and $52.9 million in SBA loans during the three and nine months ended September 30, 2024 with average premiums of 6.67% and 6.69%,
51
respectively. We sold $5.2 million and $71.9 million in SBA loans during the three and nine months ended September 30, 2023 with average premiums of 6.00% and 6.09%, respectively.
Mortgage loan servicing income, net of amortization, increased by $507,000, or 596.5%, to $422,000 during the three months ended September 30, 2024 compared to an expense balance of $85,000 for the same period of 2023. Mortgage loan servicing income increased by $2.0 million, or 857.8%, to $1.8 million during the nine months ended September 30, 2024 compared to an expense balance of $232,000 for the same period of 2023. The changes in mortgage loan servicing income were primarily due to decreases in mortgage servicing amortization and an increase in capitalized mortgage servicing assets, partially offset by the decrease in mortgage servicing fees. Included in mortgage loan servicing income for the three and nine months ended September 30, 2024 was $580,000 and $1.7 million in mortgage servicing fees compared to $606,000 and $1.9 million for the same periods in 2023 and capitalized mortgage servicing assets of $310,000 and $1.2 million for the three and nine months ended September 30, 2024 compared to $0 for the same periods in 2023. These amounts were offset by mortgage loan servicing asset amortization of $216,000 and $957,000 for the three and nine months ended September 30, 2024 compared to $691,000 and $2.2 million during the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2024, we recorded a fair value impairment of $252,000 on our mortgage servicing assets. During the three and nine months ended September 30, 2023, we did not record a fair value impairment on our mortgage servicing assets. Our total residential mortgage loan servicing portfolio was $556.4 million at September 30, 2024 compared to $464.8 million at September 30, 2023.
SBA servicing income increased by $961,000, or 355.9%, to $1.2 million for the three months ended September 30, 2024 compared to $270,000 for the three months ended September 30, 2023. SBA servicing income was $3.3 million for the nine months ended September 30, 2024 compared to $3.5 million for the same period in 2023, a decrease of $185,000, or 5.3%. Our total SBA and USDA loan servicing portfolio was $487.4 million as of September 30, 2024 compared to $487.8 million as of September 30 2023. Included in SBA servicing income for the three and nine months ended September 30, 2024 was $1.0 million and $3.2 million in SBA servicing fees compared to $1.2 million and $3.4 million for the same periods in 2023. 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 September 30, 2024, we recorded a $201,000 fair value increase to our SBA servicing rights compared to a $911,000 fair value charge to our SBA servicing rights during the three months ended September 30, 2023. During the nine months ended September 30, 2024, we recorded a $69,000 fair value increase to our SBA servicing rights compared to a $58,000 fair value increase during the nine months ended September 30, 2023.
Other noninterest income increased by $647,000, or 248.8%, to $907,000 for the three months ended September 30, 2024 compared to $260,000 for the three months ended September 30, 2023. Other noninterest income was $2.0 million for the nine months ended September 30, 2024 compared to $2.0 million for the same period in 2023, an increase of $64,000, or 3.3%. The increases were mainly due to increases in bank owned life insurance income and unrealized gains on our equity securities. These increases were partially offset by decreases in gain on sale of foreclosed real estate as a $547,000 gain on sale was recorded during the nine months ended September 30, 2023 compared to a $85,000 loss on sale being recorded during the nine months ended September 30, 2024. The largest component of other noninterest income is the income on bank owned life insurance which totaled $609,000 and $1.7 million, respectively, for the three and nine months ended September 30, 2024 compared to $452,000 and $1.3 million, respectively, for the three and nine months ended September 30, 2023. Included in other noninterest income are fair value gains/losses on our equity securities, which totaled $292,000 (gain) and $233,000 (gain) for the three and nine months ended September 30, 2024, respectively, compared to $245,000 (loss) and $187,000 (loss) for the same periods in 2023, respectively.
Noninterest Expense
Noninterest expense for the three months ended September 30, 2024 was $13.7 million compared to $11.5 million for the three months ended September 30, 2023, an increase of $2.1 million, or 18.4%. Noninterest expense for the nine months ended September 30, 2024 was $39.1 million compared to $33.8 million for the nine months ended September 30, 2023, an increase of $5.2 million, or 15.5%.
52
The following table sets forth the major components of our noninterest expense for the three and nine months ended September 30, 2024 and 2023:
(Dollars in thousands )
Noninterest Expense:
1,648
24.0
3,597
17.7
158
12.4
593
16.8
3.7
3.2
1.4
4.4
301
10.2
1,002
11.7
2,120
18.4
5,242
15.5
Salaries and employee benefits expense for the three months ended September 30, 2024 was $8.5 million compared to $6.9 million for the three months ended September 30, 2023, an increase of $1.6 million, or 24.0%. Salaries and employee benefits expense for the nine months ended September 30, 2024 was $23.9 million compared to $20.3 million for the nine months ended September 30, 2023, an increase of $3.6 million, or 17.7%. These increases were partially attributable to higher employee salaries, restricted stock expense and employee insurance, as well as higher commissions paid to our loan officers as loan volume increased during the three and nine months ended September 30, 2024 compared to the same periods in 2023.
Occupancy and equipment expense for the three months ended September 30, 2024 was $1.4 million compared to $1.3 million for the three months ended September 30, 2023, an increase of $158,000, or 12.4%. Occupancy and equipment expense for the nine months ended September 30, 2024 was $4.1 million compared to $3.5 million for the nine months ended September 30, 2023, an increase of $593,000, or 16.8%. These increases were primarily due to higher maintenance and service expense, rent expense, and depreciation expense.
Data processing expenses for the three and nine months ended September 30, 2024 remained relatively flat compared to the same periods in 2023.
Advertising expenses for the three and nine months ended September 30, 2024 remained relatively flat compared to the same periods in 2023.
Other expenses for the three months ended September 30, 2024 were $3.3 million compared to $3.0 million for the three months ended September 30, 2023, an increase of $301,000, or 10.2%. This increase was partially due to higher security expense and other real estate owned related expenses, offset by lower FDIC insurance premiums and professional fees. Other operating expenses for the nine months ended September 30, 2024 were $9.6 million compared to $8.6 million for the nine months ended September 30, 2023, an increase of $1.0 million, or 11.7%. This increase was partially due to higher FDIC insurance premiums, audit expense, security expense and other real estate owned expenses, partially offset by lower loan related expenses and legal fees. Included in other expenses for the nine months ended September 30, 2024 and 2023 were directors’ fees of approximately $477,000 and $452,000, respectively.
Income Tax Expense
Income tax expense for the three months ended September 30, 2024 and 2023 was $6.0 million and $4.2 million, respectively. The Company’s effective tax rates were 26.3% and 27.0% for the three months ended September 30, 2024 and 2023, respectively.
Income tax expense for the nine months ended September 30, 2024 and 2023 was $18.2 million and $15.6 million, respectively. The Company’s effective tax rates were 27.4% and 27.9% for the nine months ended September 30, 2024 and 2023, respectively.
Financial Condition
Total assets increased $66.4 million, or 1.9%, to $3.57 billion at September 30, 2024 as compared to $3.50 billion at December 31, 2023. The increase in total assets was primarily attributable to increases in cash and due from banks of $136.6 million, federal funds sold of $9.8 million and Federal Home Loan Bank stock of $2.4 million, partially offset by decreases in loans held for investment of $54.3 million, loans held for sale of $17.7 million and interest rate derivatives of $12.9 million.
Our investment securities portfolio made up only 0.81% of our total assets at September 30, 2024 compared to 0.82% at December 31, 2023.
Gross loans held for investment decreased $55.5 million, or 1.8%, to $3.10 billion as of September 30, 2024 as compared to $3.15 billion as of December 31, 2023. Our loan decrease during the nine months ended September 30, 2024 was comprised of a decrease of $6.7 million, or 28.9%, in construction and development loans, an increase of $27.8 million, or 3.9%, in commercial real estate loans, a decrease of $2.3 million, or 3.5%, in commercial and industrial loans, a decrease of $74.1 million, or 3.2%, in residential real estate loans and a decrease of $104,000, or 32.6%, in consumer and other loans. We had loans held for sale of $4.6 million as of September 30, 2024 compared to $22.3 million as of December 31, 2023.
The following table presents the ending balance of each major category in our loan portfolio held for investment at the dates indicated.
0.5
0.7
23.9
22.6
2.1
73.5
74.6
Gross loans
Less unearned income
Total loans held for investment
SBA and USDA Loan Servicing
As of September 30, 2024 and December 31, 2023, we serviced $487.4 million and $508.0 million, respectively, in SBA and USDA loans for others. We carried a servicing asset of $7.3 million at both September 30, 2024 and December 31, 2023, respectively. See Note 4 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information on the activity for SBA and USDA loan servicing rights for the three and nine months ended September 30, 2024 and 2023.
Residential Mortgage Loan Servicing
As of September 30, 2024, we serviced $556.4 million in residential mortgage loans for others compared to $443.1 million as of December 31, 2023. We carried a servicing asset, net of amortization, of $1.3 million at both September 30, 2024 and December 31, 2023, respectively. Amortization relating to the mortgage loan servicing asset was $216,000 and $957,000 for the three and nine months ended September 30, 2024, respectively, compared to $691,000 and $2.2 million for the same periods in 2023. During the three and nine months ended September 30, 2024, we recorded a fair value impairment of $252,000 on our mortgage servicing asset. During the three and nine months ended September 30, 2023, we did not record a fair value impairment on our mortgage servicing asset. See Note 5 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three and nine months ended September 30, 2024 and 2023.
54
Asset Quality
Nonperforming Loans
Asset quality remained strong during the third quarter of 2024 as our nonperforming loans to total loans remained low at 0.46% as of September 30, 2024. Nonperforming loans were $14.3 million at September 30 2024 compared to $14.7 million at December 31, 2023. The decrease from December 31, 2023 to September 30, 2024 was attributable to a $366,000 decrease in nonaccrual loans. We did not recognize any interest income on nonaccrual loans during the nine months ended September 30, 2024 or the year ended December 31, 2023.
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 and loans past due 90 days or more and still accruing interest. Nonperforming assets consist of nonperforming loans plus OREO. Nonaccrual loans at September 30, 2024 comprised of $537,000 of commercial real estate loans, $189,000 of commercial and industrial loans and $13.6 million of residential real estate loans. Nonaccrual loans at December 31, 2023 comprised of $548,000 of construction and development loans, $991,000 of commercial real estate loans, $1.3 million of commercial and industrial loans, and $11.9 million of residential real estate loans.
Nonaccrual loans
Past due loans 90 days or more and still accruing
Total nonperforming loans
Total nonperforming assets
15,831
16,148
Nonperforming loans to gross loans
0.46
Nonperforming assets to total assets
Allowance for credit losses to nonperforming loans
The allowance for credit losses was $18.6 million at September 30, 2024 compared to $18.1 million at December 31, 2023, an increase of $477,000, or 2.6%. The increase was primarily due to the increase in reserves allocated to our individually analyzed loans, as well as the increase in general reserves allocated to our commercial real estate loan portfolio due to higher loan balances, partially offset by the decrease in the general reserves allocated to our residential mortgage loan portfolio as a large amount of residential mortgage loans were sold during the nine months ended September 30, 2024.
We maintain a reserve for credit losses that consists of two components, the allowance for credit losses and the allowance for unfunded commitments. The allowance for credit losses provides for the risk of credit losses expected in our loan portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation. The evaluation reflects analyses of individual borrowers for impairment coupled with analysis of historical loss experience in various loan pools that have been grouped based on similar risk characteristics, supplemented as necessary by credit judgment that considers observable trends, conditions, reasonable and supportable forecasts, and other relevant environmental and economic factors. The level of the allowance for credit losses is adjusted by recording an expense or credit through the provision for credit losses. The level of the allowance for unfunded commitments is adjusted by recording an expense or credit in other noninterest expense. The allowance for unfunded commitments was created upon adoption of CECL on January 1, 2023 and had a balance of $216,000 as of September 30, 2024 compared to $294,000 as of September 30, 2023.
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value
55
of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.
The impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the provision for credit losses, and therefore, greater volatility to our reported earnings. See Note 1 and Note 3 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information on the on the allowance for credit losses and the allowance for unfunded commitments.
It is the policy of management to maintain the allowance for credit losses at a level adequate for risks inherent in the loan portfolio. The FDIC and GA DBF also review the allowance for credit losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for credit losses is adequate. However, the loan portfolio can be adversely affected if economic conditions and the real estate market in our market areas were expected 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 credit 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.
Analysis of the Allowance for Credit Losses. The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs for the periods presented below:
Balance, beginning of period
CECL adoption (Day 1) impact
Charge-offs:
221
Total charge-offs
452
Recoveries:
Total recoveries
Net (recoveries)/charge-offs
(4)
(63)
430
Balance, end of period
Total loans at end of period(1)
3,038,458
Average loans(1)
3,113,142
3,122,273
Net charge-offs to average loans
Allowance for credit losses to total loans
Management believes the allowance for credit losses is adequate to provide for losses expected in the loan portfolio as of September 30, 2024.
Total deposits decreased $7.8 million, or 0.3%, to $2.72 billion at September 30, 2024 compared to $2.73 billion at December 31, 2023. The decrease was due to a $63.1 million decrease in money market accounts (includes a $23.1 million decrease in brokered money markets), a $41.4 million decrease in interest-bearing demand deposits and a $2.2 million decrease in savings accounts, offset by a $58.5 million increase in time deposits and a $40.4 million increase in noninterest-bearing deposits. As of September 30, 2024 and December 31, 2023, 20.3% and 18.7% of total deposits, respectively, were comprised of noninterest-bearing demand accounts and 79.7% and 81.3%, respectively, of interest-bearing deposit accounts.
As of September 30, 2024 and December 31, 2023, the Company had estimated uninsured deposits of $648.8 million and $730.5 million, respectively. These estimates were derived using the same methodologies and assumptions used for the Bank's regulatory reporting. Uninsured deposits were 23.6% of total deposits at September 30, 2024, compared to 26.5% and 27.3% at December 31, 2023 and September 30, 2023, respectively. As of September 30, 2024, we had $1.28 billion of available borrowing capacity at the Federal Home Loan Bank ($701.6 million), Federal Reserve Discount Window ($532.2 million) and various other financial institutions (fed fund lines totaling $47.5 million).
We had $751.0 million of brokered deposits, or 27.6% of total deposits, at September 30, 2024 compared to $766.3 million, or 28.1% of total deposits, at December 31, 2023. 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.
We use interest rate swap and cap agreements to hedge our deposit accounts that are indexed to the federal funds effective rate. These swap agreements are designated as cash flow hedges. As of September 30, 2024, the total amount of deposits tied to the Federal Funds Effective Rate was $903.8 million. See Note 8 of our consolidated financial statements as of September 30, 2024, included elsewhere in this Form 10-Q, for additional information.
The following table summarizes our average deposit balances and weighted average rates for the three and nine months ended September 30, 2024 and 2023.
Average Rate
Noninterest-bearing demand
Interest-bearing demand deposits
108,235
2.77
111,432
1.34
Savings and money market deposits
297,624
3.98
594,664
3.45
Brokered money market deposits
696,417
1.82
455,937
5.68
2,703,171
2,683,515
3.21
57
129,226
2.92
135,576
312,639
3.92
567,433
3.35
718,068
2.38
438,888
5.34
2,730,996
3.01
2,630,021
3.00
The weighted average rates shown in the tables above are inclusive of the benefit received from the interest rate derivatives that hedge our deposit accounts tied to the federal funds effective rate. During the three months ended September 30, 2024, we recorded a credit to interest expense of $6.4 million from the benefit received on these interest rate derivatives compared to a credit to interest expense of $1.3 million recorded during the three months ended September 30, 2023. During the nine months ended September 30, 2024, we recorded a credit to interest expense of $17.0 million from the benefit received on these interest rate derivatives compared to a credit to interest expense of $2.3 million recorded during the nine months ended September 30, 2023. These benefits resulted in a 95 basis points and 83 basis points reduction to the total deposits weighted average rate for the three and nine months ended September 30, 2024, respectively, compared to a 19 basis points and 12 basis points reduction for the three and nine months ended September 30, 2023, respectively.
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 September 30, 2024 and December 31, 2023, we had available borrowing capacity from the FHLB of $701.6 million and $721.1 million, respectively. At September 30, 2024 and December 31, 2023, we had $375.0 million and $325.0 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 September 30, 2024 and December 31, 2023. We did not have any advances outstanding under these agreements as of September 30, 2024 and December 31, 2023. We also have access to the Federal Reserve’s discount window in the amount of $532.2 million and $446.3 million at September 30, 2024 and December 31, 2023, respectively. No discount window borrowings were outstanding as of September 30, 2024 and December 31, 2023. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
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/brokered deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.
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 September 30, 2024 and December 31, 2023, we had $47.5 million of unsecured federal funds lines with no amounts advanced. In addition, the Company had Federal Reserve Discount Window funds available of approximately $532.2 million and $446.3 million at September 30, 2024 and December 31, 2023, respectively. The FRB discount window line is collateralized by a pool of construction and development, commercial real estate and commercial and industrial loans with carrying balances totaling $631.1 million as of September 30, 2024, as well as all of the Company’s municipal and mortgage backed securities. There were no outstanding borrowings on this line as of September 30, 2024 and December 31, 2023.
At September 30, 2024 and December 31, 2023, we had $375.0 million and $325.0 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $701.6 million and $721.1 million of additional borrowing availability with the FHLB as of September 30, 2024 and December 31, 2023, 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 September 30, 2024 and December 31, 2023. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of September 30, 2024 and December 31, 2023. As of December 31, 2023, the FDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events since December 31, 2023 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)
10.50
10.00
Tier 1 capital (to risk-weighted assets)
8.50
8.00
CET1 capital (to risk-weighted assets)
7.00
6.50
Tier 1 capital (to average assets)
4.00
5.00
Dividends
On October 16, 2024, the Company declared a cash dividend of $0.23 per share, payable on November 8, 2024, to common shareholders of record as of October 30, 2024. 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 September 30, 2024, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of September 30, 2024 and December 31, 2023.
60
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 Federal funds effective (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 simulations comparing current or flat rates with a +/- 200 basis point ramp in rates over 12 and 24 months. These rate scenarios are considered appropriate as we believe they represent a more realistic range of rate movements that could occur in the near to medium term. 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 September 30, 2024 and December 31, 2023 are presented in the following table:
Net Interest Income Sensitivity
12 Month Projection
24 Month Projection
(Ramp in basis points)
+200
-200
1.70
(4.10)
(4.00)
(6.20)
(0.90)
1.50
7.80
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
-100
-300
(11.80)
(7.30)
(2.90)
2.30
2.50
(0.70)
(22.20)
(15.00)
(7.50)
9.40
18.60
26.10
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 September 30, 2024. 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 September 30, 2024.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2024, 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 September 30, 2024 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 2023 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 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
On September 5, 2023, 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 1,000,000 shares of the Company’s outstanding shares of common stock. The share repurchase program began on September 6, 2023 and ended on September 30, 2024. The repurchases are 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.
The following table summarizes the repurchases of our common shares for the three months ended September 30, 2024.
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 or Programs
the Plans or Programs
July 1, 2024 to July 31, 2024
925,250
August 1, 2024 to August 31, 2024
September 1, 2024 to September 30, 2024
On October 16, 2024, the Company announced the continuation of its share repurchase program that expired on September 30, 2024 (“Prior Share Repurchase Plan”), and authorized the Company to repurchase up to 925,250 shares of
the Company’s outstanding shares of common stock, which is the number of remaining shares authorized for repurchase from the Prior Share Repurchase Plan. The share repurchase program began on October 17, 2024 and ends on September 30, 2025. 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 and does not obligate the Company to purchase any shares of its common stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
During the third quarter of 2024, none of our other executive officers or directors adopted Rule 10b5-1 trading plans and none of our directors or executive officers terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).
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)
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
104
Cover Page Interactive Data File - the cover page has been formatted in Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101
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: November 8, 2024
By:
/s/ Nack Y. Paek
Nack Y. Paek
Chief Executive Officer
/s/ Lucas Stewart
Lucas Stewart
Chief Financial Officer