UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended March 31, 2020

OR

For the transition period

Commission File No. 001-38074

 

Community First Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

(770) 786-7088

(Registrant’s Telephone Number, Including Area Code)

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.01 per share         CFBIThe NASDAQ Stock Market LLC

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 requirements for the past 90 days.  YES ☒    NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.   See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

 

 

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 11, 2020, 7,570,797 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

 

 

 

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Community First Bancshares, Inc.

Form 10-Q

Table of Contents

 

 

 

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PART I – FINANCIAL INFORMATION

COMMUNITY FIRST BANCSHARES, INC.

Consolidated Balance Sheets

 

     March 31, 2020             December 31, 2019

 

See accompanying notes to unaudited consolidated financial statements.

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COMMUNITY FIRST BANCSHARES, INC.

Consolidated Statements of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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COMMUNITY FIRST BANCSHARES, INC.

Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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COMMUNITY FIRST BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

 

 

See accompanying notes to unaudited consolidated financial statements.

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COMMUNITY FIRST BANCSHARES, INC.

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Community First Bancshares, Inc. (the “Company”) is a savings and loan holding company headquartered in Covington, Georgia. The Company has one operating subsidiary, Newton Federal Bank (the “Bank”), conducting banking activities primarily in Newton County, Georgia and surrounding counties and in Cobb County, Georgia and Fulton County, Georgia and surrounding counties. The main emphasis of the Bank is providing mortgage loans in its primary lending area.  It offers such customary banking services as consumer and commercial checking accounts, savings accounts, certificates of deposit, mortgage, commercial and consumer loans, including indirect automobile loans, money transfers and a variety of other banking services.  

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company as of March 31, 2020 and the results of its operations and its cash flows for the periods presented. The interim consolidated financial information should be read in conjunction with the annual financial statements and the notes thereto included in the Company’s December 31, 2019 Form 10-K.  The results of operations for the quarter ended March 31, 2020, are not necessarily indicative of the results to be expected for a full year or for any other period.  

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Summary of Significant Accounting Policies – The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Company’s financial statements for the year ended December 31, 2019 included in the Company’s Form 10-K.

Net (loss) earnings per share is calculated for the period that the Company’s shares of common stock were outstanding which includes the current quarter and the same quarter in the previous year.  The net loss for the current period was $1,298,000 and the weighted average common shares outstanding were 7,529,582.     

Recent Accounting Pronouncements

There have been no pronouncements issued during the quarter that would have a material impact on the Company's financial statements.

On January 10, 2020, the Company consummated its merger with ABB Financial Group, Inc. (“ABB”) pursuant to the Agreement and Plan of Merger by and between the Company and ABB dated August 19, 2019, (the “Merger Agreement”), whereby ABB was merged with and into the Company, and Affinity Bank, ABB’s wholly owned commercial bank subsidiary serving Cobb County, Georgia and Fulton County, Georgia and surrounding counties, was merged with and into Newton Federal Bank. The system integration is expected to be completed in September 2020.  Affinity Bank operated one branch office in Cobb County, Georgia and one loan production office in Fulton County, Georgia.

The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add liquidity and shareholder value.

Under the terms of the Merger Agreement, each outstanding share of ABB common stock was converted into the right to receive $7.50 in cash, for a total paid of $40.3 million in cash with no stock issued.  Pre-existing ABB equity awards (restricted stock units and stock options) immediately vested upon consummation of the merger. The Company paid $2.7 million for vesting ABB restricted stock.  

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of ABB prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other real estate owned, bank owned life insurance and other assets, deposits, debt and deferred taxes with the assistance of third-party valuations, appraisals, and third-party advisors. The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.

The fair value of the assets acquired and liabilities assumed on January 10, 2020 was as follows:

 

 

The following unaudited pro forma information presents the results of operations for three months ended March 31, 2020 and 2019, as if the acquisition had occurred January 1 of each period. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

 

 

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Investment securities available-for-sale at March 31, 2020 and December 31, 2019 are as follows: (in thousands)

 

 

There were four securities in an unrealized loss position as of March 31, 2020 for less than 12 months.  There were no securities in an unrealized loss position greater than 12 months as of March 31, 2020.  The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly.  Two of the securities are collateralized mortgage obligations where the repayment sources of principal and interest are backed by U.S. Government sponsored agencies.  The other two securities are trust preferred securities where the Bank performs a credit review regularly and such review has raised no concerns.  The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis which may be at maturity.  

 

The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2020, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties. Therefore, these securities are not included in the maturity categories.  (in thousands)

 

 

  There were no sales of securities available-for-sale during the three months ended March 31, 2020 or 2019.

Securities with a carrying value of approximately $10.7 million and $3.8 million were pledged to secure public deposits and repurchase agreements at March 31, 2020 and December 31, 2019, respectively.

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

(4)Loans and Allowance for Loan Losses

Major classifications of loans, by collateral code, at March 31, 2020 and December 31, 2019 are summarized as follows: (in thousands)

 

 

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia MSA.  A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.  With the acquisition of Affinity, the Bank is a premier lender within professional markets, with a primary focus on the dental industry in Georgia and adjoining states.  The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate.

Qualifying loans in the amount of $231.3 million and $115.4 million were pledged to secure the line of credit from the Federal Home Loan Bank (“FHLB”) at March 31, 2020 and December 31, 2019, respectively.

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the three months ended March 31, 2020 and 2019: (in thousands)

 

 

The Bank individually evaluates all loans for impairment that are on nonaccrual status or are rated substandard (as described below).  Additionally, all troubled debt restructurings are evaluated for impairment.  A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected.  Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance.

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Impaired loans at March 31, 2020 and December 31, 2019 were as follows: (in thousands)

 

 

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table presents the aging of the recorded investment in past due loans, as well as the recorded investment in nonaccrual loans, as of March 31, 2020 and December 31, 2019 by class of loans: (in thousands)

 

 

There were no loans past due 90 days or greater and still accruing interest as of March 31, 2020 and December 31, 2019.

There was one new troubled debt restructuring during the three months ended March 31, 2020 and no new troubled debt restructurings during the three months ended March 31, 2019. No troubled debt restructurings subsequently defaulted during the three months ended March 31, 2020 or 2019.

 

The Bank has allocated an allowance for loan losses of approximately $15,000 and $6,000 to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2020 and December 31, 2019, respectively.

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Bank analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a continuous basis.  The Bank uses the following definitions for its risk ratings:

Special Mention. Loans have potential weaknesses that may, if not corrected, weaken or inadequately protect the Bank's credit position at some future date.  Weaknesses are generally the result of deviation from prudent lending practices, such as over advances on collateral.  Credits in this category should, within a 12-month period, move to Pass if improved or drop to Substandard if poor trends continue.

Substandard. Inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any.  Loans have a well-defined weakness or weaknesses such as primary source of repayment is gone or severely impaired or cash flow is insufficient to reduce debt.  There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans have weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.  The likelihood of a loss on an asset or portion of an asset classified Doubtful is high.

Loss.  Loans considered uncollectible and of such little value that the continuance as a Bank asset is not warranted.  This does not mean that the loan has no recovery or salvage value, but rather the asset should be charged off even though partial recovery may be possible in the future.

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.  As of March 31, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands)

 

 

 

The aggregate amounts of certificates of deposit greater than $250,000, the standard FDIC deposit insurance coverage limit per depositor, were approximately $34.5 million at March 31, 2020 and $30.2 million at December 31, 2019.      

 

The following FHLB advances, which required monthly or quarterly interest payments, were outstanding at March 31, 2020:

 

 

There were no FHLB advances as of December 31, 2019.  At March 31, 2020, the FHLB advances were collateralized by certain loans which totaled approximately $231.3 million at March 31, 2020, and by the Company’s investment in FHLB stock which totaled approximately $2.8 million at March 31, 2020.    

The Company had one FHLB letter of credit of $8.0 million and $8.0 million, used to collateralize public deposits, outstanding at March 31, 2020 and December 31, 2019, respectively.

 

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

The Company sponsors an employee stock ownership plan (“ESOP”) that covers all employees who meet certain service requirements. The Company makes annual contributions to the ESOP in amounts as defined by the plan document. These contributions are used to pay debt service and purchase additional shares. Certain ESOP shares are pledged as collateral for debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year.

In April 2017, the ESOP borrowed approximately $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. Total ESOP expense for the three months ended March 31, 2020 and 2019 was approximately $30,000 and $31,000, respectively.  The balance of the note payable of the ESOP was approximately $2.7 million at March 31, 2020 and December 31, 2019. Because the source of the loan payments is contributions received by the ESOP from the Company, the related note receivable is shown as a reduction of stockholders’ equity. As of March 31, 2020 and December 31, 2019, 35,400 shares had been released.

In August 2018, shareholders approved the Company’s 2018 Equity Incentive Plan, which authorizes the issuance of up to 517,123 shares of common stock pursuant to restricted stock grants and up to 369,374 shares of common stock pursuant to the exercise of options.

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards.  There were no stock option grants or restricted stock grants during the three months ended March 31, 2020 and 2019.       

There were no options exercised during the three months ended March 31, 2020.  Options totaling 147,749 were forfeited during the three months ended March 31, 2020 resulting in a reversal of previously recognized stock compensation expense of approximately $66,000 as none of the forfeited options had vested at the time of forfeiture.  There are a total of 99,730 stock options outstanding as of March 31, 2020.  The weighted average remaining life of outstanding options at March 31, 2020, is 9.0 years and they have an aggregate intrinsic value of $0.  No options are exercisable as of March 31, 2020.  

No restricted stock has yet vested, and 56,533 shares were forfeited during the three months ended March 31, 2020 resulting in a reversal of previously recognized stock compensation expense of approximately $86,000 as none of the forfeited restricted stock had vested at the time of forfeiture.  There were 76,441 restricted shares outstanding with a weighted average grant date fair value of $10.10 at March 31, 2020.  

The Company recognized approximately $72,000 of stock-based compensation expense during the three months ended March 31, 2020, associated with its common stock awards granted to directors and officers. As of March 31, 2020, there was approximately $870,000 of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately 4.0 years.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Cash and Cash Equivalents

The carrying value of cash and cash equivalents is a reasonable estimate of fair value.

Investment Securities Available-for-Sale

Available-for-sale securities are recorded at market value.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

FHLB Stock

The carrying value of FHLB stock approximates fair value.

Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and a specific reserve is established within the allowance for loan losses.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP.  The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Other Real Estate Owned

Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate.  Subsequently, other real estate assets are carried at fair value less estimated selling costs.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price, the Bank records the other real estate as nonrecurring Level 2.  When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the other real estate asset as nonrecurring Level 3.

Bank Owned Life Insurance

The carrying value of the cash surrender value of life insurance reasonably approximates fair value.

Deposits

The fair value of savings accounts, interest bearing checking accounts, non-interest bearing checking accounts and market rate checking accounts is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.

FHLB Advances

The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements.

Repurchase Agreements and Other Borrowings

The carrying value of repurchase agreements and other borrowings reasonably approximates fair value.

Commitments to Extend Credit

Commitments to extend credit are short-term and, therefore, the carrying value and the fair value are considered immaterial for disclosure.

Assets Recorded at Fair Value on a Recurring Basis

The Company’s only assets recorded at fair value on a recurring basis are available-for-sale securities that had fair values of approximately $18.5 million and $3.8 million at March 31, 2020 and December 31, 2019.  They are classified as Level 2.   

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2020 and December 31, 2019 (in thousands).

 

 

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COMMUNITY FIRST BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

The carrying amounts and estimated fair values (in thousands) of the Company’s financial instruments at March 31, 2020 and December 31, 2019 are as follows:

 

 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

(10)    Subsequent Event

Subsequent to quarter-end and through May 10, 2020, the Bank had received SBA authorization for over 1,100 Payroll Protection Program loans totaling $120.0 million. In addition, through April 30, 2020, the Bank had granted short-term deferrals on 819 loans that were otherwise performing of approximately $185.0 million, which included those granted prior to quarter-end.

The COVID-19 pandemic has disrupted and adversely affected the Company’s business and results of operations, and the ultimate impacts of the pandemic on the Company’s business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

 

 

 

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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:

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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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:

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.

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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

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(“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:

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.  

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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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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.

 

 

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%.

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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.

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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.

 

 

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:

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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.

 

 

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.

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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.

 

 

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.

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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.

 

 

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.

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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).

 

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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.

The information required by this item is included in Part 1, Item 2 of this quarterly report under “Management of Market Risk.”

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2020. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2020, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business.  At March 31, 2020, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

Not applicable.

Not applicable.

None.

Not applicable.

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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