Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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General
Management’s discussion and analysis of financial condition and results of operations at March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 is intended to assist in understanding the financial condition and results of operations of the Company. Evaluation of financial performance between 2020 and 2019 periods was impacted in general from the timing of the ABB acquisition. Since the balances and results of operations of the acquired entity prior to consummation are appropriately not included in the accompanying consolidated financial statements, income statement results and average balances for 2020 included partial period contributions from the 2020 acquisition versus no contribution in the 2019 periods. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
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These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
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our ability to access cost-effective funding;
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fluctuations in real estate values and both residential and commercial real estate market conditions;
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demand for loans and deposits in our market area;
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our ability to implement and change our business strategies;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
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adverse changes in the securities or secondary mortgage markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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the effects of any Federal government shutdown;
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changes in the quality or composition of our loan or investment portfolios;
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technological changes that may be more difficult or expensive than expected;
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19
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failure or breaches of IT security systems;
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the inability of third-party providers to perform as expected;
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our ability to manage market risk, credit risk and operational risk in the current economic environment;
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our ability to introduce new products and services, enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
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changes in consumer spending, borrowing and savings habits;
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changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
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our ability to retain key employees;
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our compensation expense associated with equity allocated or awarded to our employees; and
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changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
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Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the novel coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
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demand for products and services may decline, making it difficult to grow assets and income;
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if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
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collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
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the allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;
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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
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as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in the cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;
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cyber-security risks are increased as the result of an increase in the number of employees working remotely; and
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FDIC premiums may increase if the agency experience additional resolution costs.
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Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Summary of Significant Accounting Policies
A summary of our accounting policies is described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
20
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our significant accounting policies:
Business Combinations and Valuation of Loans Acquired in Business Combinations. We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it is not possible to estimate the acquisition date fair value upon consummation.
In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.
In determining the Day 1 Fair Values of acquired loans, management calculates a nonaccretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The nonaccretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, and nonaccretable difference which would have a positive impact on interest income.
The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.
Allowance for Loan Losses. The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involve judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the allowance for loan losses could change significantly.
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The allocation methodology applied by the Bank is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan losses was appropriate at March 31, 2020. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan losses. As a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is the responsibility of the Bank and any increase or decrease in the allowance is the responsibility of management.
Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
The Company and the Bank file a federal and a state income tax return. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Recent Developments
On January 10, 2020, the Company and the Bank completed the acquisition of ABB Financial Group, Inc. (“ABB”) and its wholly owned banking subsidiary, Affinity Bank. The merger consideration totaled approximately $40.3 million in cash. In addition, $5.9 million of ABB preferred stock was redeemed and $1.4 million of trust preferred securities issued by a subsidiary of ABB was acquired by the Company and canceled. The merger expanded our presence in the highly desirable Atlanta MSA and accelerated our growth strategy. The merger has also enhanced our commercial banking capabilities and added an affluent dental clientele that spurred the growth of ABB and Affinity Bank in previous years. As a result of the merger, we added $264.2 million in loans and $249.0 million in deposits. Additionally, included in the acquisition is Fitness Bank, an online reward savings account that rewards clients based on fitness goals and has spurred deposit growth for Affinity Bank in recent years.
Impact of COVID-19 Outbreak
During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, the governments of the state of Georgia and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures have dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.
To address the economic impact in the United States, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the Paycheck Protection Program
22
(“PPP”) through the Small Business Administration (“SBA”), which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meet certain other requirements.
In addition, the Federal Reserve took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero. In response to the pandemic, we have implemented protocols and processes to help protect our employees, customers and communities. These measures include:
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Operating our branches under a drive-through model with appointment-only lobby service, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home.
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Offering assistance to our customers affected by the COVID-19 pandemic, which includes payment deferrals, waiving certain fees, suspending property foreclosures, and participating in the CARES Act and lending programs for businesses, including the SBA PPP.
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We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States of America (GAAP). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.
Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased noninterest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.
Comparison of Financial Condition at March 31, 2020 and December 31, 2019
Total assets increased $323.5 million, or 101.3%, to $642.8 million at March 31, 2020 from $319.3 million at December 31, 2019. The increase was due primarily to increases in loans and investment securities as a result of our acquisition of ABB and Affinity Bank in January 2020.
Cash and cash equivalents increased $192,000, or 0.4%, to $48.3 million at March 31, 2020 from $48.1 million at December 31, 2019 as cash paid for the acquisition was partially offset with the cash balances acquired from Affinity as well as an increase in FHLB advances to help fund the acquisition.
Loans increased $273.0 million, or 110.1%, to $521.0 million at March 31, 2020 from $248.0 million at December 31, 2019. Commercial real estate loans increased $119.5 million, or 219.3%, to $174.0 million at March 31, 2020 from $54.5 million at December 31, 2019 and commercial and industrial increased $126.5 million, or 442.1%, to $155.1 million at March 31, 2020 from $28.6 million at December 31, 2019. Construction loans increased $23.7 million, or 115.8%, to $44.2 million at March 31, 2020 from $20.5 million at December 31, 2019. Consumer loans increased $6.5 million, or 20.6%, to $38.2 million at March 31, 2020 from $31.6 million at December 31, 2019. These increases are attributable to our acquisition of ABB and Affinity Bank in January 2020. These increases were partially offset by a decrease in one-to-four family residential real estate loans of $2.8 million, or 2.4%, to $114.1 million at March 31, 2020 from $116.8 million at December 31, 2019, as mortgage loans continue to be refinanced at lower rates than we offer. These changes were largely attributable to the acquisition of Affinity, which shifted the makeup of the loan portfolio toward more commercial and industrial loans and commercial real estate loans from 1-4 family mortgage loans.
Securities available-for-sale increased $14.6 million, or 383.4%, to $18.5 million at March 31, 2020 from $3.8 million at December 31, 2019, due to our acquisition of ABB and Affinity Bank in January 2020.
23
Total deposits increased $260.2 million, or 109.2%, to $498.4 million at March 31, 2020 from $238.2 million at December 31, 2019. The increase included increases of $71.1 million, or 240.6%, in non-interest-bearing checking accounts, $66.7 million, or 199.9%, in market rate checking accounts, $55.5 million, or 52.7%, in certificates of deposit, $55.1 million, or 242.9%, in savings accounts, and $11.7 million, or 24.8%, in interest-bearing checking accounts. These increases are attributable to our acquisition of ABB and Affinity Bank in January 2020.
We had $54.4 million of FHLB advances and $9.5 million of repurchase agreements and other borrowings at March 31, 2020, compared to no borrowings at December 31, 2019, as we acquired Affinity Bank in January 2020, which had both FHLB advances and repurchase agreements. Additionally, we borrowed $20.0 million from FHLB in January 2020 to help fund the acquisition.
Stockholders’ equity decreased to $75.9 million at March 31, 2020 compared to $77.2 million at December 31, 2019, primarily due to a net loss of $1.3 million for the three months ended March 31, 2020. The net loss was mostly due to non-recurring, one-time acquisition costs of $2.6 million before tax incurred during the quarter.
Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
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For the Three Months Ended March 31,
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2020
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2019
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Average
Outstanding
Balance
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Interest
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Average
Yield/Rate
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Average
Outstanding
Balance
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Interest
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Average
Yield/Rate
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(Dollars in thousands)
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Interest-earning assets:
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Loans
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$
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477,298
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$
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6,397
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5.36
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%
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$
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231,884
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$
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3,244
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|
|
5.60
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%
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Securities
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17,745
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|
131
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2.95
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%
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22,245
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|
134
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2.40
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%
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Interest-earning deposits
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43,134
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|
|
136
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1.26
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%
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|
21,627
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|
|
177
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3.28
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%
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Federal Home Loan Bank of Atlanta stock
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2,518
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34
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5.48
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%
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|
|
471
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|
8
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|
7.00
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%
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Total interest-earning assets
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540,695
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6,698
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4.96
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%
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276,227
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3,563
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5.16
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%
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Non-interest-earning assets
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55,423
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31,028
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Total assets
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$
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596,118
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|
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$
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307,255
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Interest-bearing liabilities:
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Savings accounts
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$
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67,730
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|
|
$
|
239
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|
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1.41
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%
|
|
$
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25,376
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|
|
$
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6
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|
|
|
0.10
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%
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Interest-bearing checking
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|
|
60,635
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|
|
|
77
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|
|
|
0.51
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%
|
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|
54,612
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|
|
|
99
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|
|
0.72
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%
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Market rate checking accounts
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|
95,569
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|
|
|
291
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|
|
|
1.22
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%
|
|
|
25,062
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|
|
|
51
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|
|
|
0.82
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%
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Certificates of deposits
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|
|
150,028
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|
|
656
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|
|
|
1.75
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%
|
|
|
88,368
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|
|
|
355
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|
|
|
1.61
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%
|
Total interest-bearing deposits
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|
|
373,962
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|
|
|
1,263
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|
|
|
1.35
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%
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|
|
193,418
|
|
|
|
511
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|
|
|
1.06
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%
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FHLB Advances
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|
|
48,569
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|
|
|
204
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|
|
|
1.68
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%
|
|
|
4,957
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|
|
|
24
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|
|
|
1.94
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%
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Repurchase agreements and other borrowings
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|
|
4,820
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|
|
|
4
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|
|
|
0.32
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%
|
|
|
—
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|
|
|
—
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|
|
|
—
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Total interest-bearing liabilities
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427,351
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|
|
|
1,471
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|
|
|
1.38
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%
|
|
|
198,375
|
|
|
|
535
|
|
|
|
1.08
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%
|
Non-interest-bearing liabilities
|
|
|
92,607
|
|
|
|
|
|
|
|
|
|
|
|
32,714
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|
|
|
|
|
|
|
|
|
Total liabilities
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|
|
519,958
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|
|
|
|
|
|
|
|
|
|
|
231,089
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|
|
|
|
|
|
|
|
|
Total stockholders' equity
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|
|
76,160
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|
|
|
|
|
|
|
|
|
|
|
76,166
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|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
596,118
|
|
|
|
|
|
|
|
|
|
|
$
|
307,255
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,227
|
|
|
|
|
|
|
|
|
|
|
$
|
3,028
|
|
|
|
|
|
Net interest rate spread (1)
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
4.08
|
%
|
Net interest-earning assets (2)
|
|
$
|
113,344
|
|
|
|
|
|
|
|
|
|
|
$
|
77,852
|
|
|
|
|
|
|
|
|
|
Net interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
4.38
|
%
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
126.52
|
%
|
|
|
|
|
|
|
|
|
|
|
139.25
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
|
(2)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
(3)
|
Net interest margin represents net interest income divided by average total interest-earning assets.
|
24
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
|
|
Three Months Ended March 31,
2020 vs. 2019
|
|
|
|
Increase (Decrease) Due to
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
4,081
|
|
|
$
|
(928
|
)
|
|
$
|
3,153
|
|
Securities
|
|
|
(116
|
)
|
|
|
113
|
|
|
|
(3
|
)
|
Interest-earning deposits and federal funds
|
|
|
514
|
|
|
|
(555
|
)
|
|
|
(41
|
)
|
Federal Home Loan Bank of Atlanta stock
|
|
|
38
|
|
|
|
(12
|
)
|
|
|
26
|
|
Total interest-earning assets
|
|
|
4,517
|
|
|
|
(1,382
|
)
|
|
|
3,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
27
|
|
|
|
206
|
|
|
|
233
|
|
Interest-bearing checking
|
|
|
58
|
|
|
|
(80
|
)
|
|
|
(22
|
)
|
Market rate checking
|
|
|
205
|
|
|
|
35
|
|
|
|
240
|
|
Certificates of deposits
|
|
|
267
|
|
|
|
34
|
|
|
|
301
|
|
Total deposits
|
|
|
557
|
|
|
|
195
|
|
|
|
752
|
|
FHLB Advances
|
|
|
203
|
|
|
|
(23
|
)
|
|
|
180
|
|
Repurchase agreements and other borrowings
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Total interest-bearing liabilities
|
|
|
764
|
|
|
|
172
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
3,753
|
|
|
$
|
(1,554
|
)
|
|
$
|
2,199
|
|
Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019
General. Net income decreased $1.4 million to a net loss of $1.3 million for the three months ended March 31, 2020 compared to net income of $117,000 for the three months ended March 31, 2019. The decrease was due primarily to an increase in non-interest expenses of $3.8 million, primarily related to our acquisition of ABB and Affinity Bank in January 2020. Non-recurring, one-time acquisition costs were $2.6 million before tax during the quarter.
Interest Income. Interest income increased $3.1 million, or 88.0%, to $6.7 million for the three months ended March 31, 2020 from $3.6 million for the three months ended March 31, 2019. The increase was due to increases in interest income on loans and investment securities and by increases in volumes related to the ABB and Affinity Bank acquisition slightly offset by a lower interest rate environment between the two periods.
Interest income on loans increased $3.2 million, or 97.2%, to $6.4 million for the three months ended March 31, 2020 from $3.2 million for the three months ended March 31, 2019. Our average balance of loans increased $245.4 million, or 105.8%, to $477.3 million for the three months ended March 31, 2020 from $231.9 million for the three months ended March 31, 2019. The increase in the average balance of loans resulted from our acquisition of ABB and Affinity Bank in January 2020. Our average yield on loans decreased 24 basis points to 5.36% for the three months ended March 31, 2020 from 5.60% for the three months ended March 31, 2019, due primarily to changes in our loan portfolio composition from the merger and competitive pressure on rates.
Interest income on securities (excluding FHLB stock) decreased $3,000 to $131,000 for the three months ended March 31, 2020 from $134,000 for the three months ended March 31, 2019. The average balance of securities decreased $4.5 million, or 20.2%, to $17.7 million for the three months ended March 31, 2020 from $22.2 million for the three months ended March 31, 2019, due to most of our portfolio being sold last year and the amount of securities included in the acquisition of Affinity Bank in January 2020 being less than the amount of securities we sold last year, partially offset by an increase in the average yield on securities of 55 basis points, to 2.95% from 2.40%.
25
Increases in income on loans and investment securities were partially offset by a decrease in interest income on interest-earnings deposits. Interest income on interest-earning deposits decreased $41,000, or 23.2%, to $136,000 for the three months ended March 31, 2020 from $177,000 for the three months ended March 31, 2019. The decrease in interest income on interest-earning deposits was due to a 202 basis point decrease in the average yield, as interest rates dropped significantly in the quarter, partially offset by a $21.5 million increase in the average balance, as a result of the acquisition of Affinity Bank in January 2020.
Interest Expense. Interest expense increased $936,000, or 175.0%, to $1.5 million for the three months ended March 31, 2020, compared to $535,000 for the three months ended March 31, 2019, due to increases in interest expense on deposits and borrowings as volumes increased related to the Affinity Bank acquisition and higher rates on some Affinity Bank products.
Interest expense on certificates of deposit increased $301,000, or 84.8%, to $656,000 for the three months ended March 31, 2020 from $355,000 for the three months ended March 31, 2019. The average rate we paid on certificates of deposit increased 14 basis points to 1.75% for the three months ended March 31, 2020 from 1.61% for the three months ended March 31, 2019, and the average balance of certificates of deposit increased to $150.0 million for the three months ended March 31, 2020 compared to $88.4 million for the three months ended March 31, 2019. Interest expense on market rate checking accounts and savings accounts also increased $240,000, or 470.6%, and $233,000, or 3,883.3%, respectively. These increases were due to deposits acquired in the merger. These increases were partially offset by a decrease of $22,000, or 22.2%, in interest expense on interest-bearing checking accounts, which was due to a lower interest rate environment between the two periods.
Interest expense on borrowings increased to $208,000 for the three months ended March 31, 2020 compared to $24,000 for the three months ended March 31, 2019, as the average balance on borrowings increased $48.4 million from the previous year primarily as a result of the acquisition of Affinity Bank in January 2020.
Net Interest Income. Net interest income increased $2.2 million, or 72.6%, and was $5.2 million for the three months ended March 31, 2020 compared to $3.0 million for the three months ended March 31, 2019. Our average net interest-earning assets increased by $35.5 million, or 45.6%, to $113.3 million for the three months ended March 31, 2020 from $77.9 million for the three months ended March 31, 2019, while our net interest rate spread decreased by 50 basis points to 3.58% for the three months ended March 31, 2020 from 4.08% for the three months ended March 31, 2019, reflecting a 20 basis point decrease in the yield on interest-earning assets and a 30 basis point increase in the rate paid on interest-bearing liabilities as discussed above. Our net interest margin was 3.87% for the three months ended March 31, 2020 compared to 4.38% for the three months ended March 31, 2019.
Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” for additional information.
After an evaluation of these factors, particularly in light of the COVID-19 pandemic, we recorded a provision for loan losses of $500,000 for the three months ended March 31, 2020 and no provision for the three months ended March 31, 2019. Our allowance for loan losses was $4.6 million at March 31, 2020 compared to $4.1 million at December 31, 2019 and $4.1 million at March 31, 2019. The allowance for loan losses to total loans was 0.88% at March 31, 2020 compared to 1.64% at December 31, 2019 and 1.73% at March 31, 2019. The decline in the ratio was a result of recording the Affinity Bank loan portfolio at fair value with no carryover of its allowance at the time of the merger. The allowance for loan losses to non-performing loans was 108.07% at March 31, 2020 compared to 161.07% at December 31, 2019 and 222.4% at March 31, 2019. We had net recoveries of $15,000 and $151,000 during the three months ended March 31, 2020 and 2019, respectively.
To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at March 31, 2020. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.
26
Non-interest Income. Non-interest income increased $157,000, or 44.1%, to $513,000 for the three months ended March 31, 2020 from $356,000 for the three months ended March 31, 2019. This was a result of an increase in service charges on deposit accounts of $180,000 as a result of our acquisition of ABB and Affinity Bank, partially offset by decreases in Small Business Administration loan fees and other non-interest income of $5,000 and $18,000, respectively, during the three months ended March 31, 2020.
Non-interest Expenses. Non-interest expenses information is as follows.
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits
|
|
$
|
4,173
|
|
|
$
|
1,798
|
|
|
$
|
2,375
|
|
|
|
132.1
|
%
|
Deferred compensation
|
|
$
|
63
|
|
|
|
52
|
|
|
|
11
|
|
|
|
21.2
|
%
|
Occupancy
|
|
$
|
647
|
|
|
|
478
|
|
|
|
169
|
|
|
|
35.4
|
%
|
Advertising
|
|
$
|
62
|
|
|
|
32
|
|
|
|
30
|
|
|
|
93.8
|
%
|
Data processing
|
|
$
|
644
|
|
|
|
262
|
|
|
|
382
|
|
|
|
145.8
|
%
|
Other real estate owned
|
|
$
|
—
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(100.0
|
)%
|
Net gain on sale of other real estate owned
|
|
$
|
29
|
|
|
|
(34
|
)
|
|
|
63
|
|
|
|
185.3
|
%
|
Legal and accounting
|
|
$
|
683
|
|
|
|
274
|
|
|
|
409
|
|
|
|
149.3
|
%
|
Organizational dues and subscriptions
|
|
$
|
88
|
|
|
|
80
|
|
|
|
8
|
|
|
|
10.0
|
%
|
Director compensation
|
|
$
|
49
|
|
|
|
47
|
|
|
|
2
|
|
|
|
4.3
|
%
|
Federal deposit insurance premiums
|
|
$
|
112
|
|
|
|
16
|
|
|
|
96
|
|
|
|
600.0
|
%
|
Other
|
|
$
|
531
|
|
|
|
279
|
|
|
|
252
|
|
|
|
90.3
|
%
|
Total non-interest expenses
|
|
$
|
7,081
|
|
|
$
|
3,286
|
|
|
$
|
3,796
|
|
|
|
115.5
|
%
|
Salaries and employee benefits expense, occupancy expense, legal and accounting expense, and federal deposit insurance premiums increased due to our acquisition of ABB and Affinity Bank and related growth. Data processing expense also increased due to the merger and subsequent integration of ABB’s and Affinity Bank’s records and IT systems. Advertising expense increased as a result of the larger post-merger organization. Other non-interest expense, consisting primarily of loan related expense, franchise taxes, core deposit intangible amortization and postage, increased due to the merger and included $63,000 in non-recurring, one-time merger related expenses and $48,000 in recurring core deposit intangible amortization.
Income Tax Expense. We recorded an income tax benefit of $543,000 for the three months ended March 31, 2020 compared to an income tax benefit of $19,000 for the three months ended March 31, 2019. The increase in income was due to the net loss before taxes in the 2020 period.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
|
•
|
limiting our reliance on non-core/wholesale funding sources;
|
|
•
|
growing our volume of transaction deposit accounts;
|
|
•
|
increasing our investment securities portfolio, with an average maturity of less than 15 years;
|
27
|
•
|
diversifying our loan portfolio by adding more commercial-related loans and consumer loans, which typically have shorter maturities and/or balloon payments; and
|
|
•
|
continuing to price our one- to four-family residential real estate loan products in a way that encourages borrowers to select our balloon loans as opposed to longer-term, fixed-rate loans.
|
By following these strategies, we believe that we are better positioned to react to increases in market interest rates. In addition, we originate adjustable-rate, one-to-four-family residential real estate loans and home equity loans and lines of credit, which are originated with adjustable interest rates.
We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of March 31, 2020, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.
Change in Interest Rates
(basis points) (1)
|
|
Net Interest Income
Year 1 Forecast
|
|
|
Year 1 Change
from Level
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
+400
|
|
$
|
16,818
|
|
|
|
-17.57
|
%
|
+200
|
|
|
18,602
|
|
|
|
-8.81
|
%
|
Level
|
|
|
20,400
|
|
|
—
|
|
-200
|
|
|
21,471
|
|
|
|
5.25
|
%
|
-400
|
|
|
21,035
|
|
|
|
3.11
|
%
|
(1)
|
Assumes an immediate uniform change in interest rates at all maturities.
|
The table above indicates that at March 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced an 8.81% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 5.25% increase in net interest income. At March 31, 2019, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.20% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 7.45% decrease in net interest income.
Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value or “NEV”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
28
The table below sets forth, as of March 31, 2020, the calculation of the estimated changes in our NEV that would result from the designated immediate changes in the United States Treasury yield curve.
Change in Interest
|
|
|
|
|
|
Estimated Increase (Decrease) in NEV
|
|
|
NEV as a Percentage of Present
Value of Assets (3)
|
|
Rates (basis
points) (1)
|
|
Estimated
NEV (2)
|
|
|
Amount
|
|
|
Percent
|
|
|
NEV
Ratio (4)
|
|
|
Increase (Decrease)
(basis points)
|
|
(Dollars in thousands)
|
|
+400
|
|
$
|
72,597
|
|
|
$
|
(18,295
|
)
|
|
|
(20.13
|
)%
|
|
|
11.89
|
%
|
|
|
(171
|
)
|
+200
|
|
|
82,514
|
|
|
|
(8,378
|
)
|
|
|
(9.22
|
)%
|
|
|
12.92
|
%
|
|
|
(68
|
)
|
—
|
|
|
90,892
|
|
|
—
|
|
|
—
|
|
|
|
13.60
|
%
|
|
—
|
|
-200
|
|
|
89,636
|
|
|
|
(1,256
|
)
|
|
|
(1.38
|
)%
|
|
|
13.32
|
%
|
|
|
(28
|
)
|
-400
|
|
|
87,420
|
|
|
|
(3,472
|
)
|
|
|
(3.82
|
)%
|
|
|
13.04
|
%
|
|
|
(56
|
)
|
(1)
|
Assumes an immediate uniform change in interest rates at all maturities.
|
(2)
|
NEV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
|
(3)
|
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
|
(4)
|
NEV Ratio represents NEV divided by the present value of assets.
|
The table above indicates that at March 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 9.22% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.38% decrease in net economic value. At March 31, 2019, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 10.55% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.10% increase in net economic value.
GAP Analysis. In addition, we analyze our interest rate sensitivity by monitoring our interest rate sensitivity “gap.” Our interest rate sensitivity gap is the difference between the amount of our interest-earning assets maturing or repricing within a specific time period and the amount of our interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.
29
The following table sets forth our interest-earning assets and our interest-bearing liabilities at March 31, 2020, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at March 31, 2020, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans. Amounts are based on a preliminary balance sheet as of March 31, 2020, and may not equal amounts included in our unaudited consolidated financial statements for the quarter ended March 31, 2020. However, we believe that there would be no material changes in the results of the gap analysis if the unaudited financial results included in Part 1, Item 1 of this quarterly report had been utilized.
|
|
Time to Repricing
|
|
|
|
|
|
|
|
Zero to 90 Days
|
|
|
Zero to 180 Days
|
|
|
Zero Days to
One Year
|
|
|
Zero Days to
Two Years
|
|
|
Zero Days to
Five Years
|
|
|
Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
43,205
|
|
|
|
43,205
|
|
|
|
43,205
|
|
|
|
43,205
|
|
|
|
43,205
|
|
|
$
|
48,309
|
|
Investments
|
|
|
5,273
|
|
|
|
6,684
|
|
|
|
8,341
|
|
|
|
11,081
|
|
|
|
17,292
|
|
|
|
21,289
|
|
Net loans
|
|
|
84,116
|
|
|
|
108,548
|
|
|
|
156,845
|
|
|
|
241,070
|
|
|
|
405,417
|
|
|
|
521,398
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,250
|
|
Total
|
|
$
|
132,594
|
|
|
|
158,437
|
|
|
|
208,391
|
|
|
|
295,356
|
|
|
|
465,914
|
|
|
$
|
644,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
$
|
148,671
|
|
|
|
157,074
|
|
|
|
173,878
|
|
|
|
199,876
|
|
|
|
275,881
|
|
|
$
|
340,851
|
|
Certificates of deposit
|
|
|
64,318
|
|
|
|
70,431
|
|
|
|
90,050
|
|
|
|
120,413
|
|
|
|
149,140
|
|
|
|
160,664
|
|
Borrowings
|
|
|
32,166
|
|
|
|
32,166
|
|
|
|
32,166
|
|
|
|
42,166
|
|
|
|
47,166
|
|
|
|
66,554
|
|
Other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,367
|
|
Equity capital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,811
|
|
Total (1)
|
|
$
|
245,155
|
|
|
|
259,671
|
|
|
|
296,094
|
|
|
|
362,455
|
|
|
|
472,187
|
|
|
$
|
644,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset/liability gap
|
|
$
|
(112,561
|
)
|
|
|
(101,234
|
)
|
|
|
(87,703
|
)
|
|
|
(67,099
|
)
|
|
|
(6,273
|
)
|
|
|
|
|
Gap/assets ratio (2)
|
|
|
-17.47
|
%
|
|
|
-15.71
|
%
|
|
|
-13.61
|
%
|
|
|
-10.42
|
%
|
|
|
-0.97
|
%
|
|
|
|
|
(1)
|
Amounts do not foot due to rounding.
|
(2)
|
Gap/assets ratio equals the asset/liability gap for the period divided by total assets ($642.8 million).
|
At March 31, 2020, our asset/liability gap from zero days to one year was negative $87.7 million, resulting in a gap/assets ratio of (13.61)%. At March 31, 2019, our asset/liability gap from zero days to one year was negative $6.5 million, resulting in a gap/assets ratio of (2.09)%.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and NEV tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and NEV and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
30
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At March 31, 2020, we had a $161.5 million line of credit with the Federal Home Loan Bank of Atlanta, with advances of $53.0 million outstanding and an $8.0 letter of credit outstanding, and we had a $5.0 million unsecured federal funds line of credit and a $7.5 million unsecured federal funds line of credit. No amount was outstanding on the unsecured lines of credit at March 31, 2020.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $3.2 million for the three months ended March 31, 2020, compared to net cash provided by operating activities of $1.0 million for the three months ended March 31, 2019. Net cash used in investing activities was $33.0 million and $7.0 million for the three months ended March 31, 2020 and 2019, respectively. Net cash used in investing activities typically consists primarily of disbursements for loan originations but also included $22.4 million net cash disbursed in connection with our acquisition of ABB and Affinity Bank during the three months ended March 31, 2020. Net cash provided by financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, was $36.3 million for the three months ended March 31, 2020, compared to net cash used in financing activities of $393,000 for the three months ended March 31, 2019.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At March 31, 2020, we exceeded all of our regulatory capital requirements and are categorized as “well capitalized.” Management is not aware of any conditions or events since the most recent notification that would change our category. The Bank’s actual capital amounts and ratios for March 31, 2020 and December 31, 2019 are presented in the table below (in thousands).
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
To Be Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
Adequacy
|
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
$
|
51,301
|
|
|
|
9.61
|
%
|
|
$
|
24,032
|
|
|
|
4.50
|
%
|
|
$
|
34,712
|
|
|
|
6.50
|
%
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
$
|
55,967
|
|
|
|
10.48
|
%
|
|
$
|
42,723
|
|
|
|
8.00
|
%
|
|
$
|
53,404
|
|
|
|
10.00
|
%
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
$
|
51,301
|
|
|
|
9.61
|
%
|
|
$
|
32,042
|
|
|
|
6.00
|
%
|
|
$
|
42,723
|
|
|
|
8.00
|
%
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets)
|
|
$
|
51,301
|
|
|
|
8.27
|
%
|
|
$
|
24,800
|
|
|
|
4.00
|
%
|
|
$
|
31,000
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
$
|
62,349
|
|
|
|
27.33
|
%
|
|
$
|
10,267
|
|
|
|
4.50
|
%
|
|
$
|
14,830
|
|
|
|
6.50
|
%
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
$
|
65,217
|
|
|
|
29.58
|
%
|
|
$
|
18,252
|
|
|
|
8.00
|
%
|
|
$
|
22,816
|
|
|
|
10.00
|
%
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
$
|
62,349
|
|
|
|
27.33
|
%
|
|
$
|
13,689
|
|
|
|
6.00
|
%
|
|
$
|
18,252
|
|
|
|
8.00
|
%
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets)
|
|
$
|
62,349
|
|
|
|
19.67
|
%
|
|
$
|
12,681
|
|
|
|
4.00
|
%
|
|
$
|
15,863
|
|
|
|
5.00
|
%
|
31
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2020, we had outstanding commitments to originate loans of $52.5 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from March 31, 2020 totaled $76.7 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.