10-Q 1 mcbs-20200331x10q.htm 10-Q mcbs_Current_Folio_10Q

 

 

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 March 31, 2020

 

OR

 

 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period _______ 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 of
incorporation)

(I.R.S. Employer
Identification No.)

 

 

5114 Buford Highway
Doraville, 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 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 May 13, 2020, the registrant had 25,529,891 shares of common stock, par value $0.01 per share, issued and outstanding.

 

 

 

METROCITY BANKSHARES, INC.

Quarterly Report on Form 10‑Q

March 31, 2020

TABLE OF CONTENTS

 

    

 

Page

Part I. 

 

Financial Information

 

 

 

 

 

Item l. 

 

Financial Statements:

 

 

 

Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

3

 

 

Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2020 and 2019

4

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2020 and 2019

5

 

 

Consolidated Statements of Shareholders’ Equity (unaudited) for the Three a Months Ended March 31, 2020 and 2019

6

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2020 and 2019

7

 

 

Notes to Consolidated Financial Statements (unaudited)

9

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

48

Item 4. 

 

Controls and Procedures

50

 

 

 

 

Part II. 

 

Other Information

 

 

 

 

 

Item 1. 

 

Legal Proceedings

50

Item 1A. 

 

Risk Factors

50

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3. 

 

Defaults Upon Senior Securities

53

Item 4. 

 

Mine Safety Disclosures

53

Item 5. 

 

Other Information

54

Item 6. 

 

Exhibits

54

 

 

Signatures

55

 

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

METROCITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2020

    

2019

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

  

Cash and due from banks

 

$

201,020

 

$

270,496

Federal funds sold

 

 

6,618

 

 

5,917

Cash and cash equivalents

 

 

207,638

 

 

276,413

Securities purchased under agreements to resell

 

 

40,000

 

 

15,000

Securities available for sale (at fair value)

 

 

18,182

 

 

15,695

Loans held for sale

 

 

 —

 

 

85,793

Loans, less allowance for loan losses of $6,859 and $6,839, respectively

 

 

1,254,744

 

 

1,154,323

Accrued interest receivable

 

 

5,534

 

 

5,101

Federal Home Loan Bank stock

 

 

4,873

 

 

3,842

Premises and equipment, net

 

 

14,344

 

 

14,460

Operating lease right-of-use asset

 

 

11,663

 

 

11,957

Foreclosed real estate, net

 

 

423

 

 

423

SBA servicing asset, net

 

 

7,598

 

 

8,188

Mortgage servicing asset, net

 

 

16,791

 

 

18,068

Bank owned life insurance

 

 

20,335

 

 

20,219

Other assets

 

 

2,417

 

 

2,376

Total assets

 

$

1,604,542

 

$

1,631,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Non-interest-bearing demand

 

$

320,982

 

$

292,008

Interest-bearing

 

 

921,899

 

 

1,015,369

Total deposits

 

 

1,242,881

 

 

1,307,377

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

80,000

 

 

60,000

Other borrowings

 

 

3,097

 

 

3,129

Operating lease liability

 

 

12,198

 

 

12,476

Accrued interest payable

 

 

760

 

 

890

Other liabilities

 

 

41,871

 

 

31,262

Total liabilities

 

$

1,380,807

 

$

1,415,134

 

 

 

 

 

 

 

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, 25,529,891 shares issued and outstanding as of March 31, 2020 and December 31, 2019

 

 

255

 

 

255

Additional paid-in capital

 

 

54,142

 

 

53,854

Retained earnings

 

 

169,606

 

 

162,616

Accumulated other comprehensive loss

 

 

(268)

 

 

(1)

Total shareholders' equity

 

 

223,735

 

 

216,724

Total liabilities and shareholders' equity

 

$

1,604,542

 

$

1,631,858

 

See accompanying notes to unaudited consolidated financial statements.

3

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2020

    

2019

Interest and dividend income:

 

  

 

 

  

 

Loans, including fees

 

$

19,508

 

$

18,839

Other investment income

 

 

882

 

 

868

Federal funds sold

 

 

166

 

 

155

Total interest income

 

 

20,556

 

 

19,862

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

Deposits

 

 

4,514

 

 

5,057

FHLB advances and other borrowings

 

 

132

 

 

 1

Total interest expense

 

 

4,646

 

 

5,058

 

 

 

 

 

 

 

Net interest income

 

 

15,910

 

 

14,804

 

 

 

 

 

 

 

Provision for loan losses

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

15,910

 

 

14,804

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

Service charges on deposit accounts

 

 

287

 

 

255

Other service charges, commissions and fees

 

 

2,203

 

 

2,399

Gain on sale of residential mortgage loans

 

 

2,529

 

 

938

Mortgage servicing income, net

 

 

372

 

 

1,339

Gain on sale of SBA loans

 

 

1,301

 

 

1,327

SBA servicing income, net

 

 

516

 

 

1,043

Other income

 

 

301

 

 

133

Total noninterest income

 

 

7,509

 

 

7,434

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,513

 

 

6,316

Occupancy and equipment

 

 

1,211

 

 

1,155

Data processing

 

 

277

 

 

293

Advertising

 

 

161

 

 

170

Other expenses

 

 

1,887

 

 

2,130

Total noninterest expense

 

 

10,049

 

 

10,064

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

13,370

 

 

12,174

Provision for income taxes

 

 

3,554

 

 

3,442

Net income available to common shareholders

 

$

9,816

 

$

8,732

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.36

Diluted

 

$

0.38

 

$

0.36

 

See accompanying notes to unaudited consolidated financial statements.

4

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2020

    

2019

 

 

 

 

 

 

 

Net income

 

$

9,816

 

$

8,732

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale arising during the period

 

 

(337)

 

 

44

Tax effect

 

 

70

 

 

(10)

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

(267)

 

 

34

 

 

 

 

 

 

 

Comprehensive income

 

$

9,549

 

$

8,766

 

See accompanying notes to unaudited consolidated financial statements.

5

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

Other

 

 

 

 

 

Number of

 

 

 

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Three Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2020

 

25,529,891

 

$

255

 

$

53,854

 

$

162,616

 

$

(1)

 

$

216,724

Net income

 

 —

 

 

 —

 

 

 —

 

 

9,816

 

 

 —

 

 

9,816

Stock based compensation expense

 

 —

 

 

 —

 

 

288

 

 

 —

 

 

 —

 

 

288

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(267)

 

 

(267)

Dividends on common stock ($0.11 per share)

 

 —

 

 

 —

 

 

 —

 

 

(2,826)

 

 

 —

 

 

(2,826)

Balance, March 31, 2020

 

25,529,891

 

 

255

 

 

54,142

 

 

169,606

 

 

(268)

 

 

223,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

 

24,258,062

 

$

242

 

$

39,915

 

$

128,555

 

$

(104)

 

$

168,608

Net income

 

 —

 

 

 —

 

 

 —

 

 

8,732

 

 

 —

 

 

8,732

Stock based compensation expense

 

 —

 

 

 —

 

 

315

 

 

 —

 

 

 —

 

 

315

Repurchase and retirement of common stock

 

(110,000)

 

 

 —

 

 

(1,484)

 

 

 —

 

 

 —

 

 

(1,484)

Impact of adoption of new accounting standard(1)

 

 —

 

 

 —

 

 

 —

 

 

(362)

 

 

 —

 

 

(362)

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

34

 

 

34

Dividends on common stock ($0.10 per share)

 

 —

 

 

 —

 

 

 —

 

 

(2,454)

 

 

 —

 

 

(2,454)

Balance, March 31, 2019

 

24,148,062

 

$

242

 

$

38,746

 

$

134,471

 

$

(70)

 

$

173,389


(1)

Represents the impact of the adoption of Accounting Standards Update ("ASU") No. 2016‑02: Leases

 

See accompanying notes to unaudited consolidated financial statements.

6

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2020

    

2019

Cash flow from operating activities:

 

 

  

 

 

  

Net income

 

$

9,816

 

$

8,732

Adjustments to reconcile net income to net cash provided (used) by operating activities:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

716

 

 

583

Provision for loan losses

 

 

 —

 

 

 —

Stock based compensation expense

 

 

288

 

 

315

Gain on sale of foreclosed real estate

 

 

(99)

 

 

 —

Origination of residential real estate loans held for sale

 

 

(6,992)

 

 

(139,462)

Proceeds from sales of residential real estate loans

 

 

95,314

 

 

56,088

Gain on sale of residential mortgages

 

 

(2,529)

 

 

(938)

Origination of SBA loans held for sale

 

 

(30,609)

 

 

(31,426)

Proceeds from sales of SBA loans held for sale

 

 

31,910

 

 

32,753

Gain on sale of SBA loans

 

 

(1,301)

 

 

(1,327)

Increase in cash value of bank owned life insurance

 

 

(116)

 

 

(116)

Increase in accrued interest receivable

 

 

(433)

 

 

(482)

Decrease (increase) in SBA servicing rights

 

 

590

 

 

(54)

Decrease in mortgage servicing rights

 

 

1,277

 

 

25

Decrease (increase) in other assets

 

 

29

 

 

(341)

(Decrease) increase in accrued interest payable

 

 

(130)

 

 

412

Increase in other liabilities

 

 

10,181

 

 

7,575

Net cash flow provided (used) by operating activities

 

 

107,912

 

 

(67,663)

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

  

 

 

  

Purchases of securities under resell agreements

 

 

(25,000)

 

 

 —

Purchases of securities available for sale

 

 

(3,718)

 

 

 —

Proceeds from maturities, calls or paydowns of securities available for sale

 

 

885

 

 

212

Purchase of Federal Home Loan Bank stock

 

 

(1,031)

 

 

(129)

Increase (decrease) in loans, net

 

 

(101,781)

 

 

6,802

Purchases of premises and equipment

 

 

(166)

 

 

(331)

Proceeds from sales of foreclosed real estate owned

 

 

1,459

 

 

 —

Net cash flow (used) provided by investing activities

 

 

(129,352)

 

 

6,554

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

  

 

 

  

Dividends paid on common stock

 

 

(2,807)

 

 

(2,426)

Repurchase of common stock

 

 

 —

 

 

(1,484)

(Decrease) increase in deposits, net

 

 

(64,496)

 

 

39,747

Decrease in other borrowings, net

 

 

(32)

 

 

(505)

Proceeds from Federal Home Loan Bank advances

 

 

20,000

 

 

 —

Net cash flow (used) provided by financing activities

 

 

(47,335)

 

 

35,332

 

See accompanying notes to unaudited consolidated financial statements.

7

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2020

    

2019

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(68,775)

 

 

(25,777)

Cash and cash equivalents at beginning of period

 

 

276,413

 

 

138,427

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

207,638

 

$

112,650

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer of loan principal to foreclosed real estate, net of write-downs

 

$

1,360

 

$

 —

 

 

 

 

 

 

 

Initial recognition of operating lease right-of-use assets

 

$

131

 

$

13,610

 

 

 

 

 

 

 

Initial recognition of operating lease liabilities

 

$

131

 

$

14,011

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information - Cash paid during the year for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

4,776

 

$

4,646

 

 

 

 

 

 

 

Income taxes

 

$

516

 

$

530

 

See accompanying notes to unaudited consolidated financial statements.

 

8

METROCITY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

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.

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 month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2019, which are included in the Company’s 2019 Form 10-K. There were no new accounting policies or changes to existing policies adopted during the first three months of 2020 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 March 31, 2020. Although the ultimate outcome of all claims and lawsuits outstanding as of March 31, 2020 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.

 Operating, Accounting and Reporting Considerations Related to COVID-19

The COVID-19 pandemic has negatively impacted the global economy, including the Company’s market areas. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

·

Accounting for Loan Modifications - The CARES Act provides that financial institutions may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise by categorized as a troubled debt restructure (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

9

·

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA.

Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

·

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., three months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment, as long as such modifications are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (a) 60 days after the date of termination of the nationa emergency declaration or (b) December 31, 2020.

·

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due reporting during the period of the deferral.

·

Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between the Level 1 and Level 2 hierarchy, but will be required to disclose the range and weighted average used to develop unobservable inputs for Level 3 fair value measurements. The update was effective for interim and annual periods in fiscal years beginning after December 31, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for new disclosures. As ASU 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments - Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and similar instruments) and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment (OTTI), the guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The assets will be grossed up for the allowance of expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. Adoption is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption is permitted. The Company has selected a software solution supported by a third-

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party vendor to be used in developing an expected credit loss model compliant with ASU 2016‑13. We will continue to evaluate the impact of this new accounting standard through its effective date.

The Company has further evaluated other Accounting Standards Updates issued during 2020 to date but does not expect updates other than those summarized above to have a material impact on the consolidated financial statements.

NOTE 2 – SECURITIES AVAILABLE FOR SALE

The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale as of March 31, 2020 and December 31, 2019 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Gross

    

Gross

    

Gross

    

Estimated

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

Obligations of U.S. Government entities and agencies

 

$

11,663

 

$

 —

 

$

 —

 

$

11,663

States and political subdivisions

 

 

4,963

 

 

 —

 

 

(334)

 

 

4,629

Mortgage-backed GSE residential

 

 

1,895

 

 

 5

 

 

(10)

 

 

1,890

Total

 

$

18,521

 

$

 5

 

$

(344)

 

$

18,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Gross

    

Gross

    

Gross

    

Estimated

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

Obligations of U.S. Government entities and agencies

 

$

12,436

 

$

 —

 

$

 —

 

$

12,436

States and political subdivisions

 

 

1,246

 

 

33

 

 

 —

 

 

1,279

Mortgage-backed GSE residential

 

 

2,015

 

 

 —

 

 

(35)

 

 

1,980

Total

 

$

15,697

 

$

33

 

$

(35)

 

$

15,695

 

The amortized costs and estimated fair values of investment securities available for sale at March 31, 2020, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

    

Amortized

    

Estimated

(Dollars in thousands)

 

Cost

 

Fair Value

Due in one year or less

 

$

 —

 

$

 —

Due after one year but less than five years

 

 

12,048

 

 

12,040

Due after five years but less than ten years

 

 

860

 

 

822

Due in more than ten years

 

 

3,718

 

 

3,430

Mortgage-backed GSE residential

 

 

1,895

 

 

1,890

Total

 

$

18,521

 

$

18,182

 

There were no securities pledged as of March 31, 2020 and December 31, 2019 to secure public deposits and repurchase agreements. There were no securities sold during the three months ended March 31, 2020 and 2019.

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Information pertaining to securities with gross unrealized losses at March 31, 2020 and December 31, 2019 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Twelve Months or Less

 

Over Twelve Months

 

    

Gross

    

Estimated

    

Gross

    

Estimated

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

(Dollars in thousands)

 

Losses

 

Value

 

Losses

 

Value

States and political subdivisions

 

 

(334)

 

 

3,106

 

 

 —

 

 

 —

Mortgage-backed GSE residential

 

 

 —

 

 

 —

 

 

(10)

 

 

764

Total

 

$

(334)

 

$

3,106

 

$

(10)

 

$

764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Twelve Months or Less

 

Over Twelve Months

 

    

Gross

    

Estimated

    

Gross

    

Estimated

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

(Dollars in thousands)

 

Losses

 

Value

 

Losses

 

Value

Mortgage-backed GSE residential

 

$

 —

 

$

 —

 

$

(35)

 

$

1,975

Total

 

$

 —

 

$

 —

 

$

(35)

 

$

1,975

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2020, the seven securities available for sale with unrealized losses have depreciated 8.19% from the Company’s amortized cost basis. Only one of these securities has been in a loss position for greater than twelve months.

State and political subdivisions. The Company’s unrealized losses on six investments in state and political subdivision bonds relate to interest rate increases. Management currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Because the Company does not plan to sell the investments, and because it is not more likely than not that the Company will be required to sell the investments before the recovery of the par value, which may be at maturity, management does not consider these investments to be other-than-temporarily impaired at March 31, 2020.

Mortgage-backed GSE residential. The Company’s unrealized loss on one investment in residential GSE mortgage-backed securities was caused by interest rate increases. The contractual cash flows of the investment are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the security would not be settled at a price less than the amortized cost base of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has no immediate plans to sell the investment, and because it is not more likely than not that the Company will be required to sell the investment before recovery of their amortized cost base, which may be at maturity, management does not consider this investment to be other-than-temporarily impaired at March 31, 2020.

 

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NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans at March 31, 2020 and December 31, 2019 are summarized as follows:

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31, 

(Dollars in thousands)

 

2020

 

2019

Construction and development

 

$

36,477

 

$

31,739

Commercial real estate

 

 

431,205

 

 

424,950

Commercial and industrial

 

 

60,183

 

 

53,105

Residential real estate

 

 

734,262

 

 

651,645

Consumer and other

 

 

1,454

 

 

1,768

  Total loans receivable

 

 

1,263,581

 

 

1,163,207

Unearned income

 

 

(1,978)

 

 

(2,045)

Allowance for loan losses

 

 

(6,859)

 

 

(6,839)

  Loans, net

 

$

1,254,744

 

$

1,154,323

 

The Company is not committed to lend additional funds to borrowers with non-accrual or restructured loans.

In the normal course of business, the Company may sell and purchase loan participations to and from other financial institutions and related parties. Loan participations are typically sold to comply with the legal lending limits per borrower as imposed by regulatory authorities. The participations are sold without recourse and the Company imposes no transfer or ownership restrictions on the purchaser.

A summary of changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020 and 2019 is as follows: