MetroCity Bankshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - MetroCity Bankshares, Inc.	mcbs-20200331ex3229d6bab.htm
EX-32.1 - EX-32.1 - MetroCity Bankshares, Inc.	mcbs-20200331ex3213c1f33.htm
EX-31.2 - EX-31.2 - MetroCity Bankshares, Inc.	mcbs-20200331ex312107baa.htm
EX-31.1 - EX-31.1 - MetroCity Bankshares, Inc.	mcbs-20200331ex311e52344.htm

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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

☐ 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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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:


	Three Months Ended March 31, 2020
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	131	$	2,320	$	448	$	3,457	$	91	$	392	$	6,839
Charge-offs		—		—		—		—		(23)		—		(23)
Recoveries		—		2		25		—		16		—		43
Provision		21		325		50		16		(20)		(392)		—
Ending balance	$	152	$	2,647	$	523	$	3,473	$	64	$	—	$	6,859


	Three Months Ended March 31, 2019
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	235	$	2,601	$	380	$	3,042	$	387	$	—	$	6,645
Charge-offs		—		—		—		—		(239)		—		(239)
Recoveries		—		5		—		—		115		—		120
Provision		(72)		(173)		(46)		58		3		230		—
Ending balance	$	163	$	2,433	$	334	$	3,100	$	266	$	230	$	6,526

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The following tables present, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans as of March 31, 2020 and December 31, 2019.


	March 31, 2020
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	551	$	29	$	—	$	—	$	—	$	580
Collectively evaluated for impairment		152		2,096		494		3,473		8		—		6,223
Acquired with deteriorated credit quality		—		—		—		—		56		—		56
Total ending allowance balance	$	152	$	2,647	$	523	$	3,473	$	64	$	—	$	6,859
Loans:
Individually evaluated for impairment	$	—	$	6,446	$	304	$	7,913	$	—	$	—	$	14,663
Collectively evaluated for impairment		36,346		423,002		59,789		726,349		800		—		1,246,286
Acquired with deteriorated credit quality		—		—		—		—		654		—		654
Total ending loans balance	$	36,346	$	429,448	$	60,093	$	734,262	$	1,454	$	—	$	1,261,603


	December 31, 2019
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	716	$	30	$	—	$	—	$	—	$	746
Collectively evaluated for impairment		131		1,604		418		3,457		9		392		6,011
Acquired with deteriorated credit quality		—		—		—		—		82		—		82
Total ending allowance balance	$	131	$	2,320	$	448	$	3,457	$	91	$	392	$	6,839
Loans:
Individually evaluated for impairment	$	1,360	$	7,527	$	957	$	7,936	$	—	$	—	$	17,780
Collectively evaluated for impairment		30,076		415,773		52,056		643,709		958		—		1,142,572
Acquired with deteriorated credit quality		—		—		—		—		810		—		810
Total ending loans balance	$	31,436	$	423,300	$	53,013	$	651,645	$	1,768	$	—	$	1,161,162

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Impaired loans as of March 31, 2020 and December 31, 2019, by portfolio segment, are as follows. The recorded investment consists of the unpaid total principal balance plus accrued interest receivable.


	Unpaid		Recorded		Recorded
	Total		Investment		Investment		Total
(Dollars in thousands)	Principal		With No		With		Recorded		Related
March 31, 2020	Balance		Allowance		Allowance		Investment		Allowance
Construction and development	$	—	$	—	$	—	$	—	$	—
Commercial real estate		6,446		3,727		2,790		6,517		551
Commercial and industrial		304		275		39		314		29
Residential real estate		7,913		7,913		—		7,913		—
Total	$	14,663	$	11,915	$	2,829	$	14,744	$	580


	Unpaid		Recorded		Recorded
	Total		Investment		Investment		Total
(Dollars in thousands)	Principal		With No		With		Recorded		Related
December 31, 2019	Balance		Allowance		Allowance		Investment		Allowance
Construction and development	$	1,360	$	1,360	$	—	$	1,360	$	—
Commercial real estate		7,527		4,716		2,882		7,598		716
Commercial and industrial		957		925		39		964		30
Residential real estate		7,936		7,936		—		7,936		—
Total	$	17,780	$	14,937	$	2,921	$	17,858	$	746

The average recorded investment in impaired loans and interest income recognized on the cash and accrual basis for the three months ended March 31, 2020 and 2019, by portfolio segment, are summarized in the tables below.


	Three Months Ended March 31,
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
Construction and development	$	340	$	—	$	1,360	$	6
Commercial real estate		6,704		127		8,113		81
Commercial and industrial		791		11		983		6
Residential real estate		7,842		124		3,599		3
Total	$	15,677	$	262	$	14,055	$	96

A primary credit quality indicator for financial institutions is delinquent balances. Delinquencies are updated on a daily basis and are continuously monitored. Loans are placed on nonaccrual status as needed based on repayment status and consideration of accounting and regulatory guidelines. Nonaccrual balances are updated and reported on a daily basis. Following are the delinquent amounts, by portfolio segment, as of March 31, 2020 and December 31, 2019:


					Accruing		Total				Total
(Dollars in thousands)					Greater than		Accruing				Financing
March 31, 2020	Current		30-89 Days		90 Days		Past Due		Non-accrual		Receivables
Construction and development	$	36,346	$	—	$	—	$	—	$	—	$	36,346
Commercial real estate		418,626		7,808		—		7,808		3,014		429,448
Commercial and industrial		59,946		130		—		130		17		60,093
Residential real estate		700,197		26,152		—		26,152		7,913		734,262
Consumer and other		1,454		—		—		—		—		1,454
Total	$	1,216,569	$	34,090	$	—	$	34,090	$	10,944	$	1,261,603

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					Accruing		Total				Total
(Dollars in thousands)					Greater than		Accruing				Financing
December 31, 2019	Current		30-89 Days		90 Days		Past Due		Non-accrual		Receivables
Construction and development	$	30,076	$	—	$	—	$	—	$	1,360	$	31,436
Commercial real estate		419,406		973		—		973		2,921		423,300
Commercial and industrial		52,936		58		—		58		19		53,013
Residential real estate		625,222		18,487		—		18,487		7,936		651,645
Consumer and other		1,768		—		—		—		—		1,768
Total	$	1,129,408	$	19,518	$	—	$	19,518	$	12,236	$	1,161,162

The Company utilizes a ten grade loan rating system for its loan portfolio as follows:

Loans rated Pass – Loans in this category have low to average risk.

Loans rated Special Mention – Loans do not presently expose the Company to a sufficient degree of risk to warrant adverse classification, but do possess deficiencies deserving close attention.

Loans rated Substandard – Loans are inadequately protected by the current credit-worthiness and paying capability of the obligor or of the collateral pledged, if any.

Loans rated Doubtful – Loans which have all the weaknesses inherent in loans classified Substandard, with the added characteristic that the weaknesses make collections or liquidation in full, or on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loans rated Loss – Loans classified Loss are considered uncollectible and such little value that their continuance as bankable assets is not warranted.

Loan grades are monitored regularly and updated as necessary based upon review of repayment status and consideration of periodic updates regarding the borrower’s financial condition and capacity to meet contractual requirements.

The following presents the Company’s loans, included purchased loans, by risk rating based on the most recent information available:


	Construction
(Dollars in thousands)	and		Commercial		Commercial		Residential		Consumer
March 31, 2020	Development		Real Estate		and Industrial		Real Estate		and Other		Total
Rating:
Pass	$	36,346	$	422,175	$	59,128	$	724,113	$	1,454	$	1,243,216
Special Mention		—		800		—		—		—		800
Substandard		—		6,473		965		10,149		—		17,587
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	36,346	$	429,448	$	60,093	$	734,262	$	1,454	$	1,261,603


	Construction
(Dollars in thousands)	and		Commercial		Commercial		Residential		Consumer
December 31, 2019	Development		Real Estate		and Industrial		Real Estate		and Other		Total
Rating:
Pass	$	30,076	$	416,183	$	52,033	$	641,544	$	1,768	$	1,141,604
Special Mention		—		800		—		—		—		800
Substandard		1,360		6,317		980		10,101		—		18,758
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	31,436	$	423,300	$	53,013	$	651,645	$	1,768	$	1,161,162

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Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Loans are recorded under the scope of ASC 310‑30 when it is deemed probable at acquisition that all contractually required payments will not be collected.

Loans within the scope of ASC 310‑30 are initially recorded at fair value and are evaluated for impairment on an ongoing basis. As of March 31, 2020 and December 31, 2019, the Company had auto loan pools included within the consumer segment of loans outstanding that are accounted for under ASC 310‑30 with a carrying value of $654,000 and $810,000, respectively. There was no remaining accretable yield for these loans at March 31, 2020 and December 31, 2019. At March 31, 2020 and December 31, 2019, the allowance for loan losses allocated on these loans was $56,000 and $82,000, respectively, as these loans are collectively evaluated for impairment. Interest income recognized on these loans was $10,000 and $41,000 for the three months ended March 31, 2020 and 2019, respectively.

Troubled Debt Restructures:

In this current real estate environment it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructures or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When we have modified the terms of a loan, we usually either reduce or defer payments for a period of time. We have not forgiven any material principal amounts on any loan modifications to date. Nonperforming TDRs are generally placed on non-accrual under the same criteria as all other loans.

TDRs as of March 31, 2020 and December 31, 2019 quantified by loan type classified separately as accrual and nonaccrual are presented in the table below.


(Dollars in thousands)
March 31, 2020	Accruing		Nonaccrual		Total
Commercial real estate	$	2,901	$	480	$	3,381
Commercial and industrial		21		4		25
Total	$	2,922	$	484	$	3,406


(Dollars in thousands)
December 31, 2019	Accruing		Nonaccrual		Total
Commercial real estate	$	2,437	$	482	$	2,919
Commercial and industrial		22		5		27
Total	$	2,459	$	487	$	2,946

Our policy is to return nonaccrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers payment history of the borrower, but is not dependent upon a specific number of payments. The Company allocated a specific reserve of $362,000 and $344,000, as of March 31, 2020 and December 31, 2019, respectively, and recognized no partial charge offs on the TDR loans described above during the three months ended March 31, 2020 and 2019. There were no TDRs which defaulted during the three months ended March 31, 2020. TDR commercial real estate loans totaling $296,000 defaulted during the three months ended March 31, 2019. These defaults did not have a material impact on the Company’s allowance for loan loss.

During the three months ended March 31, 2020, we modified one commercial real estate loan. The total recorded investment in this modified loan was $527,000 as of March 31, 2020. During the year ended December 31, 2019, we modified one commercial and industrial loan. The total recorded investment in the modified loan was $25,000 as of December 31, 2019. The modification of these loans did not result in a permanent reduction of the recorded investment in

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the loan, but did result in a payment deferment period on the loans. At March 31, 2020, the Company did not have any commitments to lend additional funds to debtors whose terms have been modified in troubled restructurings.

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either defer, or decrease monthly payments for a temporary period of time. A summary of the types of concessions for loans classified as troubled debt restructurings are presented in the table below:


(Dollars in thousands)	March 31,		December 31,
Type of Concession	2020		2019
Deferral of payments	$	508	$	22
Extension of maturity date		2,898		2,924
Total TDR loans	$	3,406	$	2,946

The following table presents loans by portfolio segment modified as TDRs and the corresponding recorded investment, which includes accrued interest and fees, as of March 31, 2020 and December 31, 2019:


	March 31, 2020			December 31, 2019
(Dollars in thousands)	Number of	Recorded		Number of	Recorded
Type	Loans	Investment		Loans	Investment
Commercial real estate	5	$	3,423	4	$	2,923
Commercial and industrial	2		30	2		31
Total	7	$	3,453	6	$	2,954

Modifications in Response to COVID-19

Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to three months. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral). See Note 1 - Summary of Significant Accounting Policies for more information.

As of May 11, 2020, we had non-SBA commercial loans and residential mortgages with outstanding balances of $151.2 million and $145.5 million, respectively, that had been approved for a three month payment deferral. The Small Business Administration (SBA) has guaranteed the principal and interest payments of all our SBA loan customers for six months.

NOTE 4 – SBA AND USDA LOAN SERVICING

The Company sells the guaranteed portion of certain SBA and USDA loans it originates and continues to service the sold portion of the loan. The portion of the loans sold are not included in the financial statements of the Company. As of March 31, 2020 and December 31, 2019, the unpaid principal balances of serviced loans totaled $464.6 million and $441.6 million, respectively.

Activity for SBA loan servicing rights are as follows:


	For the Three Months Ended March 31,
(Dollars in thousands)	2020		2019
Beginning of period	$	8,162	$	8,419
Change in fair value		(589)		56
End of period, fair value	$	7,573	$	8,475

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Fair value at March 31, 2020 and December 31, 2019 was determined using discount rates ranging from 8.44% to 13.80% and 5.80% to 12.06%, respectively, and prepayment speeds ranging from 11.94% to 17.91% and 10.82% to 16.54%, respectively, depending on the stratification of the specific right. Average default rates are based on the industry average for the applicable NAICS/SIC code.

The aggregate fair market value of the interest only strips included in SBA servicing assets was $25,000 and $26,000 at March 31, 2020 and December 31, 2019, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type and interest rate, were used to stratify the originated loan servicing rights. No valuation allowances are recorded against capitalized servicing rights or interest only strips as of March 31, 2020 and December 31, 2019.

NOTE 5 – RESIDENTIAL MORTGAGE LOAN SERVICING

Residential mortgage loans serviced for others are not reported as assets. The outstanding principal of these loans at March 31, 2020 and December 31, 2019 was $1.19 billion and $1.17 billion, respectively.

Activity for mortgage loan servicing rights and the related valuation allowance are as follows:


(Dollars in thousands)	For the Three Months Ended March 31,
Mortgage loan servicing rights:	2020		2019
Beginning of period	$	18,068	$	14,934
Additions		984		794
Amortization expense		(1,377)		(819)
Valuation allowance		(884)		—
End of period, carrying value	$	16,791	$	14,909


(Dollars in thousands)	For the Three Months Ended March 31,
Valuation allowance:	2020		2019
Beginning balance	$	—	$	—
Additions expensed		884		—
Reductions credited to operations		—		—
Direct write-downs		—		—
Ending balance	$	884	$	—

The fair value of servicing rights was $17.4 million and $19.0 million at March 31, 2020 and December 31, 2019, respectively. Fair value at March 31, 2020 was determined by using a discount rate of 14%, prepayment speeds of 20%, and a weighted average default rate of 1.03%. Fair value at December 31, 2019 was determined using a discount rate of 14%, prepayment speeds of 16%, and a weighted average default rate of 0.98%.

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NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES & OTHER BORROWINGS

Advances from the Federal Home Loan Bank (FHLB) at March 31, 2020 and December 31, 2019 are summarized as follows:


(Dollars in thousands)	March 31, 2020		December 31, 2019
Convertible advance with Bermudan option maturing August 6, 2029; fixed rate of 0.85%	$	20,000	$	20,000
Convertible advance with Bermudan option maturing November 7, 2029; fixed rate of 0.68%		30,000		30,000
Convertible advance with Bermudan option maturing December 5, 2029; fixed rate of 0.75%		10,000		10,000
Convertible advance with Bermudan option maturing February 1, 2030; fixed rate of 0.59%		20,000		—
Total FHLB advances	$	80,000	$	60,000

At March 31, 2020, the Company had maximum borrowing capacity from the FHLB of $490.8 million based on the value of residential and commercial real estate loans pledged as collateral.

At March 31, 2020, the Company had unsecured federal funds lines available with correspondent banks of approximately $47.5 million. There were no advances outstanding on these lines at March 31, 2020.

At March 31, 2020, the Company had Federal Reserve Discount Window funds available of approximately $10.0 million. The funds are collateralized by a pool of commercial real estate and commercial and industrial loans totaling $31.7 million as of March 31, 2020. There were no outstanding borrowings on this line as of March 31, 2020.

The Company sells the guaranteed portion of certain SBA loans it originates and continues to service the sold portion of the loan. The Company sometimes retains an interest only strip or servicing fee that is considered to be more than customary market rates. An interest rate strip can result from a transaction when the market rate of the transaction differs from the stated rate on the portion of the loan sold.

The sold portion of SBA loans that satisfies at least one of the above provisions are considered secured borrowings and are included in other borrowings. Secured borrowings at March 31, 2020 and December 31, 2019 were $3.1 million.

NOTE 7 – OPERATING LEASES

The Company has entered into various operating leases for certain branch locations with terms extending through July 2028. Generally, these leases have initial lease terms of ten years or less. Many of the leases have one or more renewal options which typically are for five years at the then fair market rental rates. We assessed these renewal options using a threshold of reasonably certain. For leases where we were reasonably certain to renew, those option periods were included within the lease term, and therefore, the measurement of the right-of-use (ROU) asset and lease liability. None of our leases included options to terminate the lease and none had initial terms of 12 months or less (i.e. short-term leases). Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets. The Company currently does not have any finance leases.

Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental collateralized borrowing rate provided by the FHLB at the lease commencement date. ROU assets are further adjusted for lease incentives, if any. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the Consolidated Statements of Income.

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The components of lease cost were as follows:


	For the Three Months Ended March 31,
(Dollars in thousands)	2020		2019
Operating lease cost	$	552	$	491
Variable lease cost		47		47
Short-term lease cost		—		—
Sublease income		—		—
Total net lease cost	$	599	$	538

Future maturities of the Company’s operating lease liabilities are summarized as follows:


(Dollars in thousands)
Twelve Months Ended:	Lease Liability
March 31, 2021	$	2,038
March 31, 2022		1,886
March 31, 2023		1,940
March 31, 2024		1,906
March 31, 2025		1,780
After March 31, 2025		4,092
Total lease payments		13,642
Less: interest discount		(1,444)
Present value of lease liabilities	$	12,198



Supplemental Lease Information	March 31, 2020
Weighted-average remaining lease term (years)	7.1
Weighted-average discount rate	3.13	%


	For the Three Months Ended March 31,
(Dollars in thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (cash payments)	$	504	$	476
Operating cash flows from operating leases (lease liability reduction)	$	409	$	375
Operating lease right-of-use assets obtained in exchange for leases entered into during the period	$	131	$	13,610

NOTE 8 – REVENUE RECOGNITION

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The implementation of the new guidance did not have a material impact on the measurement or recognition of revenue. The Company did not record a cumulative effect adjustment to opening retained earnings. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, and investment securities, as well as revenue related to our loan servicing activities and revenue on bank owned life insurance, as these activities are subject to other GAAP discussed

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elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income are as follows:

Service charges on deposits: Income from service charges on deposits is within the scope of ASC 606. These include general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue on these types of fees are recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Service charges on deposits also include overdraft and NSF fees. Overdraft fees are charged when a depositor has a draw on their account that has inadequate funds. All services charges on deposit accounts represent less than 1.1% of total revenues in the three months ended March 31, 2020 and 2019.

Other Service Charges, Commissions and Fees: Other service charges, commissions and fees are primarily comprised of mortgage origination related income, wire fees, interchange fees, and other service charges and fees. Mortgage origination related income, which makes up the majority of the other service charges, commissions and fees line item amounts reported on the Consolidated Statements of Income, consists of mortgage loan origination fees, underwriting fees, processing fees, and application fees. The Company’s performance obligations for other service charges, commissions and fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gain or loss on sale of OREO: This revenue stream is recorded when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present. This revenue stream is within the scope of ASC 606 and is included in other income in noninterest income, but no significant revenues were generated from gains and losses on the sale and financing of OREO for the three months ended March 31, 2020 and 2019.

Other revenue streams that are recorded in other income in noninterest income include revenue generated from letters of credit and income on bank owned life insurance. These revenue streams are either not material or out of scope of ASC 606.

NOTE 9 – LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for

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on-balance-sheet instruments. Financial instruments where contract amounts represent credit risk as of March 31, 2020 and December 31, 2019 include:


	March 31,		December 31,
(Dollars in thousands)	2020		2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	57,690	$	64,243
Standby letters of credit	$	5,187	$	5,213

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit includes $57.7 million of unused lines of credit and $5.2 million to make loans as of March 31, 2020. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

The Company maintains cash deposits with a financial institution that during the year are in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution were not to honor its contractual liability, the Company could incur losses. Management is of the opinion that there is not material risk because of the financial strength of the institution.

NOTE 10 – FAIR VALUE

Financial Instruments Measured at Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following presents the assets and liabilities as of March 31, 2020 and December 31, 2019 which are measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall,

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and the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded:


	March 31, 2020
									Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Obligations of U.S. Government entities and agencies	$	11,663	$	—	$	—	$	11,663
States and political subdivisions		4,629		—		4,629		—
Mortgage-backed GSE residential		1,890		—		1,890		—
Total securities available for sale		18,182		—		6,519		11,663

SBA servicing asset		7,573		—		—		7,573
Interest only strip		25		—		—		25
	$	25,780	$	—	$	6,519	$	19,261
Non-recurring fair value measurements:
Impaired loans	$	2,122	$	—	$	—	$	2,122	$	138


	December 31, 2019
									Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Obligations of U.S. Government entities and agencies	$	12,436	$	—	$	—	$	12,436
States and political subdivisions		1,279		—		1,279		—
Mortgage-backed GSE residential		1,980		—		1,980		—
Total securities available for sale		15,695		—		3,259		12,436

SBA servicing asset		8,162		—		—		8,162
Interest only strip		26		—		—		26
	$	23,883	$	—	$	3,259	$	20,624
Non-recurring fair value measurements:
Impaired loans	$	4,523	$	—	$	—	$	4,523	$	338

The Company used the following methods and significant assumptions to estimate fair value:

Securities, Available for Sales: The Company carries securities available for sale at fair value. For securities where quoted prices are not available (Level 2), the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

The Company owns certain SBA investments that for which the fair value is determined using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades. Discounted cash flows are calculated by a third party using interest rate curves that are updated to incorporate current market conditions, including prepayment vectors and credit risk. During time when trading is more liquid, broker quotes are used to validate the model.

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SBA Servicing Assets and Interest Only Strip: The fair values of the Company’s servicing assets are determined using Level 3 inputs. All separately recognized servicing assets and servicing liabilities are initially measured at fair value initially and at each reporting date and changes in fair value are reported in earnings in the period in which they occur.

The fair values of the Company’s interest-only strips are determined using Level 3 inputs. When the Company sells loans to others, it may hold interest-only strips, which is an interest that continues to be held by the transferor in the securitized receivable. It may also obtain servicing assets or assume servicing liabilities that are initially measured at fair value. Gain or loss on sale of the receivables depends in part on both (a) the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the interests that continue to be held by the transferor based on their relative fair value at the date of transfer, and (b) the proceeds received. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for interests that continue to be held by the transferor, so the Company generally estimates fair value based on the future expected cash flows estimated using management’s best estimates of the key assumptions — credit losses and discount rates commensurate with the risks involved.

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.

Impaired loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

Foreclosed real estate: Foreclosed real estate is adjusted to fair value upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices or appraised values of the collateral and is classified as nonrecurring Level 3. Adjustments are routinely made in the appraisal process by the independent appraisers engaged by the Company to adjust for differences between the comparable sales. Appraised values are reviewed by management using our market knowledge and historical experience.

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Changes in level 3 fair value measurements

The table below presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and 2019 and year ended December 31, 2019:


	Obligations of		SBA
(Dollars in thousands)	U.S. Government		Servicing		Interest Only
Three Months Ended:	Entities and Agencies		Asset		Strip		Liabilities
Fair value, January 1, 2020	$	12,436	$	8,162	$	26	$	—
Total loss included in income		—		(589)		(1)		—
Settlements		—		—		—		—
Prepayments/paydowns		(773)		—		—		—
Transfers in and/or out of level 3		—		—		—		—
Fair value, March 31, 2020	$	11,663	$	7,573	$	25	$	—

Fair value, January 1, 2019	$	15,183	$	8,419	$	27	$	—
Total gain (loss) included in income		—		56		(2)		—
Settlements		—		—		—		—
Prepayments/paydowns		(105)		—		—		—
Transfers in and/or out of level 3		—		—		—		—
Fair value, March 31, 2019	$	15,078	$	8,475	$	25	$	—

Twelve Months Ended:
Fair value, January 1, 2019	$	15,183	$	8,419	$	27	$	—
Total loss included in income		—		(257)		(1)		—
Settlements		—		—		—		—
Prepayments/paydowns		(2,747)		—		—		—
Transfers in and/or out of level 3		—		—		—		—
Fair value, December 31, 2019	$	12,436	$	8,162	$	26	$	—

There were no gains or losses included in earnings for securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods presented above. The only activity for these securities were prepayments. There were no purchases, sales, or transfers into and out of Level 3. The following table presents quantitative information about recurring Level 3 fair value measures at March 31, 2020 and December 31, 2019:


	Valuation	Unobservable	General
	Technique	Input	Range
March 31, 2020
Obligations of U.S. Government entities and agencies	Discounted Cash Flows	Discount Rate	0%-3%
SBA servicing asset and interest only strip	Discounted Cash Flows	Prepayment speed	11.94%-17.91%
		Discount rate	8.44%-13.80%

December 31, 2019
Obligations of U.S. Government entities and agencies	Discounted Cash Flows	Discount Rate	0%-3%
SBA servicing asset and interest only strip	Discounted Cash Flows	Prepayment speed	10.82%-16.54%
		Discount rate	5.80%-12.06%

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


	Carrying			Estimated Fair Value at March 31, 2020
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash, due from banks, and federal funds sold	$	207,638	$	—	$	207,638	$	—	$	207,638
Securities purchased under agreements to resell		40,000		—		40,000		—		40,000
Investment securities		18,182		—		6,519		11,663		18,182
FHLB stock		4,873		—		—		—		N/A
Loans, net		1,254,744		—		—		1,284,356		1,284,356
Loans held for sale		—		—		—		—		—
Accrued interest receivable		5,534		—		—		5,534		5,534
SBA servicing assets		7,573		—		—		7,573		7,573
Interest only strips		25		—		—		25		25
Mortgage servicing assets		16,791		—		—		17,394		17,394
Financial Liabilities:
Deposits		1,242,881		—		1,246,858		—		1,246,858
Federal Home Loan Bank advances		80,000		—		80,000		—		80,000
Other borrowings		3,097		—		3,097		—		3,097
Accrued interest payable		760		—		760		—		760


	Carrying		Estimated Fair Value at December 31, 2019
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash, due from banks, and federal funds sold	$	276,413	$	—	$	276,413	$	—	$	276,413
Securities purchased under agreements to resell		15,000		—		15,000		—		15,000
Investment securities		15,695		—		3,259		12,436		15,695
FHLB stock		3,842		—		—		—		N/A
Loans, net		1,154,323		—		—		1,169,214		1,169,214
Loans held for sale		85,793		—		88,178		—		88,178
Accrued interest receivable		5,101		—		—		5,101		5,101
SBA servicing asset		8,162		—		—		8,162		8,162
Interest only strips		26		—		—		26		26
Mortgage servicing assets		18,068		—		—		19,035		19,035
Financial Liabilities:
Deposits		1,307,377		—		1,308,946		—		1,308,946
Federal Home Loan Bank advances		60,000		—		60,000		—		60,000
Other borrowings		3,129		—		3,129		—		3,129
Accrued interest payable		890		—		890		—		890

NOTE 11 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available for sale securities, if any, is not included in computing regulatory capital.

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Management believes as of March 31, 2020, the Company and Bank meets all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Company’s actual capital amounts (in thousands) and ratios are also presented in the following table:


									To Be Well Capitalized
					Minimum Capital Required -				Under Prompt Corrective
	Actual				Basel III				Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount ≥		Ratio ≥		Amount ≥	Ratio ≥
As of March 31, 2020:
Total Capital (to Risk Weighted Assets)
Consolidated	$	223,264	22.44	%	N/A	*	N/A	*	N/A	N/A
Bank		207,451	20.86	%	104,441		10.5	%	99,468	10.0	%
Tier I Capital (to Risk Weighted Assets)
Consolidated		216,405	21.75	%	N/A	*	N/A	*	N/A	N/A
Bank		200,592	20.17	%	84,548		8.5	%	79,574	8.0	%
Common Tier 1 (CET1)
Consolidated		216,405	21.75	%	N/A	*	N/A	*	N/A	N/A
Bank		200,592	20.17	%	69,627		7.0	%	64,654	6.5	%
Tier 1 Capital (to Average Assets)
Consolidated		216,405	13.40	%	N/A	*	N/A	*	N/A	N/A
Bank		200,592	12.42	%	64,595		4.0	%	80,743	5.0	%
As of December 31, 2019:
Total Capital (to Risk Weighted Assets)
Consolidated	$	215,377	22.01	%	N/A	*	N/A	*	N/A	N/A
Bank		199,539	20.40	%	102,705		10.5	%	97,814	10.0	%
Tier I Capital (to Risk Weighted Assets)
Consolidated		208,538	21.31	%	N/A	*	N/A	*	N/A	N/A
Bank		192,700	19.70	%	83,142		8.5	%	78,251	8.0	%
Common Tier 1 (CET1)
Consolidated		208,538	21.31	%	N/A	*	N/A	*	N/A	N/A
Bank		192,700	19.70	%	68,470		7.0	%	63,579	6.5	%
Tier 1 Capital (to Average Assets)
Consolidated		208,538	12.70	%	N/A	*	N/A	*	N/A	N/A
Bank		192,700	11.74	%	65,655		4.0	%	82,069	5.0	%

* The Board of Governors of the Federal Reserve raised the threshold for determining applicable of the Small Bank Holding Company and Savings and Loan Company Policy Statement in August 2018 from $1 Billion to $3 Billion in consolidated total assets to provide regulatory burden relief, therefore, the Company is no longer subject to the minimum capital requirements.

NOTE 12 – STOCK BASED COMPENSATION

The Company adopted the MetroCity Bankshares, Inc. 2018 Stock Option Plan (the “Prior Option Plan”) effective as of April 18, 2018, and the Prior Option Plan was approved by the Company’s shareholders on May 30, 2018. The Prior Option Plan provided for awards of stock options to officers, employees and directors of the Company. The Board of Directors of the Company determined that it was in the best interests of the Company and its shareholders to amend and restate the Prior Option Plan to provide for the grant of additional types of awards. Acting pursuant to its authority under

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the Prior Option Plan, the Board of Directors approved and adopted the MetroCity Bankshares, Inc. 2018 Omnibus Incentive Plan (the “2018 Incentive Plan”), which constitutes the amended and restated version of the Prior Option Plan. The Board of Directors has reserved 2,400,000 shares of Company common stock for issuance pursuant to awards granted under the 2018 Incentive Plan, any or all of which may be granted as nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance awards and other stock-based awards. In the event all or a portion of a stock award is forfeited, cancelled, expires, or is terminated before becoming vested, paid, exercised, converted, or otherwise settled in full, any unissued or forfeited shares again become available for issuance pursuant to awards granted under the 2018 Incentive Plan and do not count against the maximum number of reserved shares. In addition, shares of common stock deducted or withheld to satisfy tax withholding obligations will be added back to the share reserve and will again be available for issuance pursuant to awards granted under the plan. The 2018 Incentive Plan is administered by the Compensation Committee of our Board of Directors (the “Committee”). The determination of award recipients under the 2018 Incentive Plan, and the terms of those awards, will be made by the Committee. At March 31, 2020, 240,000 stock options had been granted and no shares of restricted stock had been issued under the 2018 Incentive Plan.

Stock Options

A summary of stock option activity for the three months ended March 31, 2020 is presented below:


		Weighted
		Average
	Shares	Exercise Price
Outstanding at January 1, 2020	240,000	$	12.70
Granted	—		—
Exercised	—		—
Forfeited	—		—
Outstanding at March 31, 2020	240,000	$	12.70

During the three months ended March 31, 2020 and 2019, the Company recognized compensation expense for stock options of $119,000. As of March 31, 2020 and December 31, 2019, there was $595,000 and $714,000, respectively, of total unrecognized compensation cost related to options granted under the Plan. As of March 31, 2020, the cost is expected to be recognized over a weighted-average period of 1.3 years.

Restricted Stock

The Company has periodically issued restricted stock to its directors, executive officers and certain employees under the 2018 Incentive Plan. Compensation expense for restricted stock is based upon the grant date fair value of the shares and is recognized over the vesting period of the awards. Shares of restricted stock issued to officers and employees vest in equal annual installments on the first three anniversaries of the grant date. Shares of restricted stock issued to directors vest 25% on the grant date and 25% on each of the first three anniversaries of the grant date.

A summary of restricted stock activity for the three months ended March 31, 2020 is presented below:


		Weighted-
		Average Grant-
Nonvested Shares	Shares	Date Fair Value
Nonvested at January 1, 2020	169,204	$	9.35
Granted	—		—
Vested	—		—
Forfeited	—		—
Nonvested at March 31, 2020	169,204	$	9.35

During the three months ended March 31, 2020 and 2019, the Company recognized compensation expense for restricted stock of $169,000 and $197,000, respectively. As of March 31, 2020 and December 31, 2019, there was $869,000 and $1.1 million, respectively, of total unrecognized compensation cost related to nonvested shares granted under

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the Plan. As of March 31, 2020, the cost is expected to be recognized over a weighted-average period of 1.6 years. No restricted shares vested during the three months ended March 31, 2020.

NOTE 13 – EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:


	Three Months Ended
	March 31,
(Dollars in thousands except per share data)	2020		2019
Basic earnings per share
Net Income	$	9,816	$	8,732

Weighted average common shares outstanding		25,529,891		24,238,506

Basic earnings per common share	$	0.38	$	0.36

Diluted earnings per share
Net Income	$	9,816	$	8,732

Weighted average common shares outstanding for basic earnings per common share		25,529,891		24,238,506
Add: Dilutive effects of restricted stock and options		206,544		302,032

Average shares and dilutive potential common shares		25,736,435		24,540,538

Diluted earnings per common share	$	0.38	$	0.36

There were no stock options or restricted stock excluded from the computation of diluted earnings per common share since they were antidilutive for the three months ended March 31, 2020 and 2019.

NOTE 14 – SUBSEQUENT EVENTS

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. The COVID-19 pandemic has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. In response to the outbreak, federal and state authorities in the United States introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The full impact of the COVID-19 pandemic is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets, and employment. The COVID-19 pandemic may have a significant adverse impact on certain industries the Company serves, including restaurants and food services, hotels, retail and energy.

On March 27, 2020, the CARES Act, a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of the pandemic, was signed into law. Section 4013 of the CARES Act also addressed COVID-19-related modifications and specified that COVID-19-related modifications executed between March 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii) December 31, 2020, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other 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 under ASC Subtopic 310-40. These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on customers and prospects, and on the national and local economy as a whole, there can be no assurances as to

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how the crisis may ultimately affect the Company’s loan portfolio. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and off-balance sheet credit exposures.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of MetroCity Bancshares, Inc. and our wholly owned subsidiary, Metro City Bank, from December 31, 2019 through March 31, 2020 and on our results of operations for the three months ended March 31, 2020 and 2019. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10‑Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10‑Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this quarterly report and the following:

business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitations, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions related to COVID-19, including as a result of participation in and execution of government programs related to COVID-19;

factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of various projects that we finance;

concentration of our loan portfolio in real estate loans changes in the prices, values and sales volumes of commercial and residential real estate;

credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial, residential real estate and SBA loan portfolios;

negative impact in our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation, the Bank’s or third party’s failure to satisfy

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mortgage servicing obligations, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers;

our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories;

our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;

changes in interest rate environment, including changes to the federal funds rate, and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income;

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses (“ALL”);

the adequacy of our reserves (including ALL) and the appropriateness of our methodology for calculating such reserves;

our ability to successfully execute our business strategy to achieve profitable growth;

the concentration of our business within our geographic areas of operation and to the general Asian-American population within our primary market areas;

our focus on small and mid-sized businesses;

our ability to manage our growth;

our ability to increase our operating efficiency;

liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;

risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;

a large percentage of our deposits are attributable to a relatively small number of customers;

inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;

the makeup of our asset mix and investments;

external economic, political and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;

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challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;

restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity;

increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

a failure in the internal controls we have implemented to address the risks inherent to the business of banking;

inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;

changes in our management personnel or our inability to retain motivate and hire qualified management personnel;

the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets;

our ability to identify and address cyber-security risks, fraud and systems errors;

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;

disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;

fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts;

risks related to potential acquisitions;

the expenses that we will incur to operate as a public company and our inexperience complying with the requirements of being a public company;

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;

changes in the scope and cost of FDIC insurance and other coverage;

changes in our accounting standards;

changes in tariffs and trade barriers;

changes in federal tax law or policy; and

other risks and factors identified in our Annual Report on Form 10-K for the year ended December 31, 2019, including those identified under the heading “Risk Factors”.

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The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Quarterly Report on Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

COVID-19 Pandemic

During March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a golobal pandemic in response to the rapidly growing outbreak of the virus. COVID-19 has significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines, and has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

The Company prioritizes the health and safety of its teammates and customers, and has taken protective measures such as implementing remote work arrangements to the full extent possible and by adjusting banking center hours and operational measures to promote social distancing, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company is closely monitoring the effects of the COVID-19 pandemic on our loan and deposit customers, and is assessing the risks in our loan portfolio and working with our customers to reduce the pandemic’s impact on them while minimizing losses for the Company. In addition, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves.

We have implemented loan programs to allow customers who are experiencing hardships from the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days. The Small Business Administration (SBA) has also guaranteed the principal and interest payments of all our SBA loan customers for six months. As of May 11, 2020, we had 88 non-SBA commercial customers with outstanding loan balances totaling $151.2 million who have been approved for a three month payment deferral. Of these non-SBA payment deferrals, 22 loans totaling $69.8 million with a current weighted average loan-to-value (“LTV”) of 58.3% were in the hotel industry and 9 loans totaling $6.1 million with a current weighted average LTV of 66.4% were in the restaurant industry, which are two industries heavily impacted by the COVID-19 pandemic. As of March 31, 2020, the Company had 48 loans totaling $114.5 million in the hotel industry and 116 loans totaling $45.8 million in the restaurant industry.

As a preferred SBA lender, we are participating in the SBA Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act to help provide loans to our business customers in need. As of May 11, 2020, the Company has closed or approved with the SBA over 1,650 PPP loans for an aggregate amount of funds in excess of $94.3 million. We will be using our current cash balances and available liquidity from the Federal Home Loan Bank and Federal Reserve Bank to fund these PPP loans.

As of March 31, 2020, our residential real estate loan portfolio made up 58.1% of our total loan portfolio and had a weighted average LTV of approximately 56.9%. As of May 11, 2020, 19.8% of our residential mortgages have been

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approved for a hardship payment deferral covering principal and interest payments for three months. The following table presents our outstanding residential mortgage balances, weighted average LTVs and current approved payment deferrals by property state.


	March 31, 2020			Approved Payment Deferrals
		% of Total
(Dollars in thousands)	Outstanding	Mortgage	Weighted	Outstanding
State	Loan Balance	Portfolio	Average LTV	Loan Balance	% of State
New York	$ 332,276	45.2%	55.1%	80,601	24.3%
Georgia	183,362	25.0%	57.0%	30,820	16.8%
Pennsylvania	47,673	6.5%	62.4%	3,636	7.6%
New Jersey	41,248	5.6%	56.6%	8,905	21.6%
Texas	37,226	5.1%	60.7%	6,504	17.5%
Florida	33,857	4.6%	62.3%	4,198	12.4%
Virginia	28,135	3.8%	54.8%	5,256	18.7%
Other (AL, CA, DC, CT, MA, MD)	30,485	4.2%	60.1%	5,548	18.2%
Total residential real estate loans	$ 734,262	100.0%	56.9%	$ 145,468	19.8%

Overview

MetroCity Bankshares, Inc. is a bank holding company headquartered in the Atlanta metropolitan area. We operate through our wholly-owned banking subsidiary, Metro City Bank, a Georgia state-chartered commercial bank that was founded in 2006. We currently operate 19 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. As of March 31, 2020, we had total assets of $1.60 billion, total loans (including loans held for sale) of $1.26 billion, total deposits of $1.24 billion and total shareholders’ equity of $223.7 million.

We are a full-service commercial bank focused on delivering personalized service in an efficient and reliable manner to the small to medium-sized businesses and individuals in our markets, predominantly Asian-American communities in growing metropolitan markets in the Eastern U.S. and Texas. We offer a suite of loan and deposit products tailored to meet the needs of the businesses and individuals already established in our communities, as well as first generation immigrants who desire to establish and grow their own businesses, purchase a home, or educate their children in the United States. Through our diverse and experienced management team and talented employees, we are able to speak the language of our customers and provide them with services and products in a culturally competent manner.

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Selected Financial Data

The following table sets forth unaudited selected financial data for the most recent five quarters. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2.


	As of or for the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
(Dollars in thousands, except per share data)	2020			2019			2019			2019			2019
Selected income statement data:
Interest income	$	20,556		$	20,625		$	21,908		$	20,818		$	19,862
Interest expense		4,646			5,681			5,929			5,570			5,058
Net interest income		15,910			14,944			15,979			15,248			14,804
Provision for loan losses		—			—			—			—			—
Noninterest income		7,509			9,360			11,001			12,098			7,434
Noninterest expense		10,049			9,840			10,162			9,934			10,064
Income tax expense		3,554			3,794			4,462			4,452			3,442
Net income		9,816			10,670			12,356			12,960			8,732
Per share data:
Basic income per share	$	0.38		$	0.42		$	0.51		$	0.54		$	0.36
Diluted income per share	$	0.38		$	0.42		$	0.50		$	0.53		$	0.36
Dividends per share	$	0.11		$	0.11		$	0.11		$	0.10		$	0.10
Book value per share (at period end)	$	8.76		$	8.49		$	8.00		$	7.58		$	7.20
Shares of common stock outstanding		25,529,891			25,529,891			24,305,378			24,305,378			24,148,062
Weighted average diluted shares		25,736,435			25,586,733			24,502,621			24,386,049			24,540,538
Performance ratios:
Return on average assets		2.44	%		2.57	%		3.07	%		3.44	%		2.42	%
Return on average equity		18.21			20.40			26.44			29.61			20.90
Dividend payout ratio		28.80			26.36			21.79			18.85			28.10
Yield on total loans		6.11			6.04			6.22			6.11			6.18
Yield on average earning assets		5.42			5.27			5.78			5.83			5.80
Cost of average interest bearing liabilities		1.78			2.06			2.23			2.23			2.10
Cost of deposits		1.86			2.15			2.29			2.23			2.11
Net interest margin		4.19			3.82			4.22			4.27			4.32
Efficiency ratio(1)		42.91			40.49			37.66			36.33			45.26
Asset quality data (at period end):
Net charge-offs/(recoveries) to average loans held for investment		(0.01)	%		0.00	%		(0.11)	%		0.01	%		0.04	%
Nonperforming assets to gross loans and OREO		1.13			1.30			1.18			1.41			0.98
ALL to nonperforming loans		49.47			46.54			47.19			38.67			58.46
ALL to loans held for investment		0.54			0.59			0.54			0.54			0.57
Balance sheet and capital ratios:
Gross loans held for investment to deposits		101.67	%		88.97	%		94.46	%		91.88	%		88.68	%
Noninterest bearing deposits to deposits		25.83			22.34			23.30			23.87			23.38
Common equity to assets		13.94			13.28			11.82			12.09			11.70
Leverage ratio		13.40			12.70			11.68			11.67			11.35
Common equity tier 1 ratio		21.75			21.31			18.82			17.99			17.40
Tier 1 risk-based capital ratio		21.75			21.31			18.82			17.99			17.40
Total risk-based capital ratio		22.44			22.01			19.51			18.66			18.09
Mortgage and SBA loan data:
Mortgage loans serviced for others	$	1,186,825		$	1,168,601		$	1,122,551		$	1,016,352		$	839,352
Mortgage loan production		119,667			112,259			163,517			188,713			151,068
Mortgage loan sales		92,737			106,548			152,503			205,893			55,123
SBA loans serviced for others		464,576			441,593			446,266			443,830			425,694
SBA loan production		43,459			30,763			48,878			45,850			29,556
SBA loan sales		29,958			30,065			28,914			28,675			30,751

⁽¹⁾

Represents noninterest expense divided by total revenue (net interest income and total noninterest income)

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Results of Operations

We recorded net income of $9.8 million for the three months ended March 31, 2020 compared to $8.7 million for the same period in 2019, an increase of $1.1 million, or 12.4%. Basic and diluted earnings per common share for the three months ended March 31, 2020 was $0.38, compared to $0.36 for the basic and diluted earnings per common share for the same period in 2019.

Interest Income

Interest income totaled $20.6 million for the three months ended March 31, 2020, an increase of $694,000, or 3.5%, from the three months ended March 31, 2019, primarily due to an increase of $48.6 million in average loans, including loans held for sale, and $73.7 million in federal funds sold and interest-earning cash accounts. The increase in average loans included increases of $48.0 million and $26.4 million in average commercial real estate loans and commercial and industrial loans. As compared to the three months ended March 31, 2019, the yield on average interest-earning assets decreased by 38 basis points to 5.42% from 5.80% with the yield on average loans decreasing by 7 basis points and the yield on average total investments decreasing by 96 basis points.

Interest Expense

Interest expense for the three months ended March 31, 2020 decreased $412,000 to $4.6 million compared to interest expense of $5.1 million for the three months ended March 31, 2019. This increase is partially attributable to a 25 basis points decrease in deposit costs to 1.86% from 2.11%, which includes a 74 basis points decrease in the yield on average money market deposits and a 10 basis points decrease in the yield on average time deposits. Average money market deposits increased by $104.6 million while average time deposits decreased by $108.6 million.

Average borrowings outstanding for the three months ended March 31, 2020 increased by $71.5 million with an increase in rate of 61 basis points compared to the three months ended March 31, 2019.

Net Interest Margin

The net interest margin for the three months ended March 31, 2020 decreased by 13 basis points to 4.19% from 4.32% for the three months ended March 31, 2019, primarily due to a 32 basis point increase in the cost of interest-bearing liabilities of $1.05 billion and a decrease of 38 basis points in the yield on average interest-earning assets of $1.53 billion. Average earning assets increased by $137.0 million, primarily due to an increase of $48.6 million in average loans and $73.7 million in federal funds sold and interest-earning cash accounts. Average interest-bearing liabilities increased by $70.9 million, primarily driven by an increase in average borrowings of $71.5 million while average interest-bearing deposits remained relatively flat.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. The decline in our net interest margin is primarily the result of a continuous increase in our cost of funds; however, we have been able to partially offset this through growing our volume of interest earning assets.

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Average Balances, Interest and Yields

The following tables present, for the three months ended March 31, 2020 and 2019, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin.


	Three Months Ended March 31,
	2020						2019
	Average		Interest and		Yield /		Average		Interest and		Yield /
(Dollars in thousands)	Balance		Fees		Rate		Balance		Fees		Rate
Earning Assets:
Federal funds sold and other investments(1)	$	193,361	$	802	1.67	%	$	119,678	$	787	2.67	%
Securities purchased under agreements to resell		32,033		140	1.76			15,000		113	3.06
Securities available for sale		16,664		106	2.56			18,943		123	2.63
Total investments		242,058		1,048	1.74			153,621		1,023	2.70
Construction and development		27,233		397	5.86			38,874		652	6.80
Commercial real estate		476,684		7,251	6.12			428,665		7,300	6.91
Commercial and industrial		60,019		979	6.56			33,606		601	7.25
Residential real estate		718,469		10,840	6.07			731,437		10,236	5.68
Consumer and other		1,629		41	10.12			2,890		50	7.02
Gross loans(2)		1,284,034		19,508	6.11			1,235,472		18,839	6.18
Total earning assets		1,526,092		20,556	5.42			1,389,093		19,862	5.80
Noninterest-earning assets		93,504						75,109
Total assets		1,619,596						1,464,202
Interest-bearing liabilities:
NOW and savings deposits		58,202		43	0.30			54,782		49	0.36
Money market deposits		189,262		669	1.42			84,665		451	2.16
Time deposits		726,034		3,802	2.11			834,665		4,557	2.21
Total interest-bearing deposits		973,498		4,514	1.86			974,112		5,057	2.11
Borrowings		75,876		132	0.70			4,332		1	0.09
Total interest-bearing liabilities		1,049,374		4,646	1.78			978,444		5,058	2.10
Noninterest-bearing liabilities:
Noninterest-bearing deposits		299,088						293,251
Other noninterest-bearing liabilities		54,325						23,095
Total noninterest-bearing liabilities		353,413						316,346
Shareholders' equity		216,809						169,412
Total liabilities and shareholders' equity	$	1,619,596					$	1,464,202
Net interest income			$	15,910					$	14,804
Net interest spread					3.64						3.70
Net interest margin					4.19						4.32

⁽¹⁾

Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.

⁽²⁾

Average loan balances include nonaccrual loans and loans held for sale.

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Rate/Volume Analysis

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volumes and rate have been allocated to volume.


	Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
	Increase (Decrease) Due to Change in:
(Dollars in thousands)	Volume		Yield/Rate		Total Change
Earning assets:
Federal funds sold and other investments(1)	$	401	$	(386)	$	15
Securities purchased under agreements to resell		90		(63)		27
Securities available for sale		(14)		(3)		(17)
Total investments		477		(452)		25
Construction and development		(171)		(84)		(255)
Commercial real estate		863		(912)		(49)
Commercial and industrial		440		(62)		378
Residential real estate		(84)		688		604
Consumer and Other		(4)		(5)		(9)
Gross loans(2)		1,044		(375)		669
Total earning assets		1,521		(827)		694
Interest-bearing liabilities:
NOW and savings deposits		(3)		(3)		(6)
Money market deposits		(247)		465		218
Time deposits		(535)		(220)		(755)
Total interest-bearing deposits		(785)		242		(543)
Borrowings		(1)		132		131
Total interest-bearing liabilities		(786)		374		(412)
Net interest income	$	2,307	$	(1,201)	$	1,106

⁽¹⁾

Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.

⁽²⁾

Average loan balances include nonaccrual loans and loans held for sale.

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Provision for Loan Losses

We recorded no provision for loan losses for the three months ended March 31, 2020 and 2019 as asset quality remained strong. Our allowance for loan losses as a percentage of gross loans for the periods ended March 31, 2020 and 2019 was 0.54% and 0.57%, respectively. Our ALL as a percentage of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for loan loss ratios compared to other commercial or consumer loans due to their low LTVs.

See the section captioned “Allowance for Loan Losses” elsewhere in this document for further analysis of our provision for loan losses.

Noninterest Income

Noninterest income for the three months ended March 31, 2020 was $7.5 million, an increase of $75,000, or 1.0%, compared to $7.4 million for the three months ended March 31, 2019. The following table sets forth the major components of our noninterest income for the three months ended March 31, 2020 and 2019:


	Three Months Ended March 31,
(Dollars in thousands)	2020		2019		$ Change		% Change
Noninterest income:
Service charges on deposit accounts	$	287	$	255	$	32	12.5	%
Other service charges, commissions and fees		2,203		2,399		(196)	(8.2)
Gain on sale of residential mortgage loans		2,529		938		1,591	169.6
Mortgage servicing income, net		372		1,339		(967)	(72.2)
Gain on sale of SBA loans		1,301		1,327		(26)	(2.0)
SBA servicing income, net		516		1,043		(527)	(50.5)
Other income		301		133		168	126.3
Total noninterest income	$	7,509	$	7,434	$	75	1.0	%

Service charges on deposit accounts increased $32,000 to $287,000 for the three months ended March 31, 2020 compared to $255,000 for the same three months during 2019. The increase is partially attributable to increased analysis fees.

Other service charges, commissions and fees decreased $196,000 to $2.2 million for the three months ended March 31, 2020 compared to $2.4 million for the three months ended March 31, 2019. This decrease is attributable to a $421,000 decrease in underwriting, processing and origination fees earned from our origination of residential mortgage loans offset by increases on various other service charge, commission and fee accounts.

Total gain on sale of loans was $3.8 million for the three months ended March 31, 2020 compared to $2.3 million for the same period of 2019, an increase of $1.6 million, or 69.1%.

Gain on sale of residential mortgage loans totaled $2.5 million for the three months ended March 31, 2020 compared to $938,000 for the same period of 2019. We sold $92.7 million in residential mortgage loans during the three months ended March 31, 2020 with an average premium of 2.78%. We sold $55.1 million in residential mortgage loans during the three months ended March 31, 2019 with an average premium of 1.75%. We originated $119.7 million of residential mortgage loans during the three months ended March 31, 2020 compared to $151.1 million for the same period in 2019.

Gain on sale of SBA loans totaled $1.3 million for the three months ended March 31, 2020 and 2019. We sold $30.0 million in SBA loans during the three months ended March 31, 2020 with an average premium of 6.50%. We sold $30.8 million in SBA loans during the three months ended March 31, 2019 with an average premium of 6.51%.

Mortgage loan servicing income, net of amortization, decreased by $967,000, or 72.2%, to $372,000 during the three months ended March 31, 2020 compared to $1.3 million for the same period of 2019. The decrease in mortgage loan servicing income was primarily due to increased servicing asset amortization and a fair value impairment charge. Included

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in mortgage loan servicing income for the three months ended March 31, 2020 was $1.6 million in mortgage servicing fees compared to $1.4 million for the same period in 2019, and capitalized mortgage servicing assets of $1.0 million for the three months ended March 31, 2020 and $794,000 for the same period in 2019. The amounts were offset by mortgage loan servicing asset amortization of $1.4 million for the three months ended March 31, 2020 compared to $819,000 during the same period in 2019. During the three months ended March 31, 2020, we recorded a fair value impairment of $884,000 on our mortgage servicing asset partially due to increased prepayment speeds during the quarter. No fair value impairment charge was recorded during the three months ended March 31, 2019. Our total residential mortgage loan servicing portfolio was $1.19 billion at March 31, 2020 compared to $839.4 million at March 31, 2019.

SBA servicing income, net decreased by $527,000 to $516,000 for the three months ended March 31, 2020 compared to $1.0 million for the three months ended March 31, 2019. Our total SBA loan servicing portfolio was $464.6 million as of March 31, 2020 compared to $425.7 million as of March 31, 2019. Our SBA servicing rights are carried at fair value. While our servicing portfolio grew, the inputs used to calculate fair value also changed, which resulted in a $585,000 charge to our SBA servicing rights in the three months ended March 31, 2020 compared to a $56,000 increase to our SBA servicing rights during the three months ended March 31, 2019.

Other noninterest income increased by $168,000 to $301,000 for the three months ended March 31, 2020 compared to $133,000 for the three months ended March 31, 2019. The largest component of other noninterest income is the income on bank owned life insurance which totaled $116,000 for the three months ended March 31, 2020 and 2019.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2020 was $10.0 million compared to $10.1 million for the three months ended March 31, 2019, a slight decrease of $15,000, or 0.1%. The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2020 and 2019:


	Three Months Ended March 31,
(Dollars in thousands )	2020		2019		$ Change		% Change
Noninterest Expense:
Salaries and employee benefits	$	6,513	$	6,316	$	197	3.1	%
Occupancy		1,211		1,155		56	4.8
Data processing		277		293		(16)	(5.5)
Advertising		161		170		(9)	(5.3)
Other operating		1,887		2,130		(243)	(11.4)
Total noninterest expense	$	10,049	$	10,064	$	(15)	(0.1)	%

Salaries and employee benefits expense for the three months ended March 31, 2020 was $6.5 million compared to $6.3 million for the three months ended March 31, 2019, an increase of $197,000, or 3.1%. This increase was attributable to an increase in the overall number of employees necessary to support our continued growth. The average number of full-time equivalent employees was 211 for the three months ended March 31, 2020 compared to 196 for the three months ended March 31, 2019.

Occupancy expense for the three months ended March 31, 2020 and 2019 was $1.2 million with an increase of $56,000, or 4.8%, during the three months ended March 31, 2020 compared to the same period in 2019. This increase was primarily due to increased rental expense and fixed asset depreciation.

Data processing expense for the three months ended March 31, 2020 was $277,000 compared to $293,000 for the three months ended March 31, 2019, a decrease of $16,000, or 5.5%. This slight decrease was primarily due to management’s ongoing efforts to reduce costs.

Advertising expense for the three months ended March 31, 2020 remained relatively flat compared to the same period in 2019.

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Other operating expenses for the three months ended March 31, 2020 were $1.9 million compared to $2.1 million for the three months ended March 31, 2019, a decrease of $243,000, or 11.4%. This decrease was partially due to lower mortgage related expenses, as well as decreased operating and customer service expenses. Included in other expenses for the three months ended March 31, 2020 and 2019 were directors’ fees of approximately $91,000 and $81,000, respectively.

Income Tax Expense

Income tax expense for the three months ended March 31, 2020 and 2019 was $3.6 million and $3.4 million, respectively. The Company’s effective tax rates were 26.6% and 28.3% for the three months ended March 31, 2020 and 2019, respectively.

Financial Condition

Total assets decreased $27.3 million, or 1.7%, to $1.60 billion at March 31, 2020 as compared to $1.63 billion at December 31, 2019. The decrease in total assets was primarily attributable to decreases in cash and due from banks of $69.5 million and loans held for sale of $85.8 million, partially offset by a $100.4 million increase in loans held for investment.

Loans

Gross loans increased $100.4 million, or 8.6%, to $1.26 billion as of March 31, 2020 as compared to $1.16 billion as of December 31, 2019. Our loan growth during the three months ended March 31, 2020 was comprised of an increase of $4.7 million, or 14.9%, in construction and development loans, an increase of $6.3 million, or 1.5%, in commercial real estate loans, an increase of $7.1 million, or 13.3%, in commercial and industrial loans, an increase of $82.6 million, or 12.7%, in residential real estate loans and a decrease of $314,000, or 17.8%, in consumer and other loans. Loans held for sale were zero at March 31, 2020 compared to $85.8 million at December 31, 2019.

The following table presents the ending balance of each major category in our loan portfolio held for investment at the dates indicated.


	March 31, 2020				December 31, 2019
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Construction and development	$	36,477	2.9	%	$	31,739	2.7	%
Commercial real estate		431,205	34.1	%		424,950	36.5	%
Commercial and industrial		60,183	4.8	%		53,105	4.6	%
Residential real estate		734,262	58.1	%		651,645	56.0	%
Consumer and other		1,454	0.1	%		1,768	0.2	%
Gross loans	$	1,263,581	100.0	%	$	1,163,207	100.0	%
Less unearned income		(1,978)				(2,045)
Total loans held for investment	$	1,261,603			$	1,161,162

SBA Loan Servicing

As of March 31, 2020 and December 31, 2019, we serviced $464.6 million and $441.6 million, respectively, in SBA loans for others. The size our SBA loan servicing portfolio continues to grow as we have consistently originated and sold portions of the SBA loans we originate while retaining loan servicing rights. We carried a servicing asset of $7.6 million and $8.2 million at March 31, 2020 and December 31, 2019, respectively. See Note 4 of our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for additional information on the activity for SBA loan servicing rights for the three months ended March 31, 2020 and 2019.

Residential Mortgage Loan Servicing

As of March 31, 2020, we serviced $1.19 billion in residential mortgage loans for others compared to $1.17 billion as of December 31, 2019. We carried a servicing asset, net of amortization, of $16.8 million and $18.1 million at March 31,

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2020 and December 31, 2019, respectively. Amortization relating to the mortgage loan servicing asset was $1.4 million for the three months ending March 31, 2020 compared to $819,000 for the same period in 2019. During the three months ended March 31, 2020, we recorded a fair value impairment of $884,000 on our mortgage servicing asset. No fair value impairment charge was recorded during the three months ended March 31, 2019. See Note 5 of our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three a months ended March 31, 2020 and 2019.

Asset Quality

Nonperforming Loans

Asset quality remained strong during the first quarter of 2020. The outbreak of COVID-19 will likely have an impact on our asset quality, but it is unknown to what extent at this point. Nonperforming loans were $13.9 million at March 31, 2020 compared to $14.7 million at December 31, 2019. The decrease from December 31, 2019 to March 31, 2020 was primarily attributable to a $1.4 million decrease in nonaccrual construction and development loans, partially offset by the $463,000 increase in accruing TDRs. We did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2020 and year ended December 31, 2019.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings. Nonaccrual loans at March 31, 2020 comprised of $3.0 million of commercial real estate loans, $17,000 in commercial and industrial loans and $7.9 million in residential real estate loans. Nonaccrual loans at December 31, 2019 comprised of $1.4 million of construction and development loans, $2.9 million in commercial real estate loans, $19,000 in commercial and industrial loans, and $7.9 million in residential real estate loans.


(Dollars in thousands)	March 31, 2020			December 31, 2019
Nonaccrual loans	$	10,944		$	12,236
Past due loans 90 days or more and still accruing		—			—
Accruing troubled debt restructured loans		2,922			2,459
Total nonperforming loans		13,866			14,695
Other real estate owned		423			423
Total nonperforming assets	$	14,289		$	15,118
Nonperforming loans to gross loans		1.10	%		1.26	%
Nonperforming assets to total assets		0.89	%		0.93	%
Allowance for loan losses to nonperforming loans		49.47	%		46.54	%

In March 2020, regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID–19. The agencies confirmed with the staff of the FASB that short–term modifications made on a good faith basis in response to the COVID–19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. See Note 1 to of our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for more information regarding accounting treatment of loan modifications as a response to COVID-19.

Allowance for Loan Losses

The allowance for loan losses was $6.9 million at March 31, 2020 compared to $6.8 million at December 31, 2019, a slight increase of $20,000, or 0.3%. We increased the qualitative factors in our allowance for loan losses calculation as of March 31, 2020 for the economic uncertainties caused by the COVID-19 pandemic; however, these increases did not result in additional provision for loan losses as of March 31, 2020 given the level of unallocated reserves as of December 31, 2019, net recovery for the quarter and the low credit risk and loss allocation associated with our residential real estate portfolio. The Company is not required to implement the provisions of the current expected credit losses accounting standard issued by the Financial Accounting Standards Board in the Accounting Standards Update No. 2016-13 until January 1, 2023, and is continuing to account for the allowance for loan losses under the incurred loss model.

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In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial, commercial real estate, construction and land development loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.

It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. The FDIC and Georgia Department of Banking and Finance also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if economic conditions and the real estate market in our market areas were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs for the periods presented below:


	Three Months Ended March 31,
(Dollars in thousands )	2020			2019
Balance, beginning of period	$	6,839		$	6,645
Charge-offs:
Construction and development		—			—
Commercial real estate		—			—
Commercial and industrial		—			—
Residential real estate		—			—
Consumer and other		23			239
Total charge-offs		23			239
Recoveries:
Construction and development		—			—
Commercial real estate		2			5
Commercial and industrial		25			—
Residential real estate		—			—
Consumer and other		16			115
Total recoveries		43			120
Net charge-offs/(recoveries)		(20)			119
Provision for loan losses		—			—
Balance, end of period	$	6,859		$	6,526
Total loans at end of period	$	1,263,581		$	1,138,631
Average loans(1)		1,241,138			1,136,450
Net charge-offs to average loans		(0.01)	%		0.04	%
Allowance for loan losses to total loans		0.54	%		0.57	%

(1)

Excludes loans held for sale

Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of March 31, 2020; provided, however, that with the emergence of the COVID-19 pandemic late in the first quarter of 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.S. economy, the impact on collectability is not currently known, and it is possible that additional provisions for credit losses could be needed in future periods.

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Deposits

Total deposits decreased $64.5 million, or 4.9%, to $1.24 billion at March 31, 2020 compared to $1.31 billion at December 31, 2019. As of March 31, 2020, 25.8% of total deposits were comprised of noninterest-bearing demand accounts and 74.2% of interest-bearing deposit accounts compared to 22.3% and 77.7% as of December 31, 2019, respectively.

We had no brokered deposits at March 31, 2020 and December 31, 2019. We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from the Federal Home Loan Bank.

The following table summarizes our average deposit balances and weighted average rates for the three months ended March 31, 2020 and 2019.


	Three Months Ended March 31,
	2020					2019
	Average		Weighted			Average		Weighted
(Dollars in thousands )	Balance		Average Rate			Balance		Average Rate
Noninterest-bearing demand	$	299,088		—	%	$	293,251	—	%
Interest-bearing demand deposits		41,347		0.20			33,127	0.20
Savings and money market deposits		206,117		1.36			106,320	1.85
Time deposits		726,034		2.11			834,665	2.21
Total interest-bearing deposits		973,498		1.86			974,112	2.11
Total deposits	$	1,272,586		1.43		$	1,267,363	1.62

Borrowed Funds

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. At March 31, 2020 and December 31, 2019, we had maximum borrowing capacity from the FHLB of $490.8 million and $494.3 million, respectively. At March 31, 2020 and December 31, 2019, we had $80 million and $60 million, respectively, of outstanding advances from the FHLB.

In addition to our advances with the FHLB, we maintain federal funds agreements with our correspondent banks. Our available borrowings under these agreements were $47.5 million at March 31, 2020 and December 31, 2019. We did not have any advances outstanding under these agreements as of March 31, 2020 and December 31, 2019.

Liquidity and Capital Resources

Liquidity

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. To provide more liquidity in response to the COVID-19 pandemic, the Federal reserve has recently taken steps to encourage broader

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use of the discount window. As of March 31, 2020 and December 31, 2019, we had $47.5 million of unsecured federal funds lines with no amounts advanced. In addition, we have access to the Federal Reserve’s discount window in the amount of $10.0 million with no borrowings outstanding as of March 31, 2020 and December 31, 2019. The Federal Reserve discount window line is collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $31.7 million as of March 31, 2020.

At March 31, 2020 and December 31, 2019, we had $80 million and $60 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $410.8 million and $434.3 million of additional borrowing availability with the FHLB as of March 31, 2020 and December 31, 2019, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

Capital Requirements

The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.

The table below summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of March 31, 2020 and December 31, 2019. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of March 31, 2020 and December 31, 2019. As of December 31, 2019, the FDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events since December 31, 2019 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted in future periods.


							Regulatory
							Capital Ratio
							Requirements		Minimum
							including		Requirement
							fully phased-		for "Well
					Regulatory		in Capital		Capitalized"
					Capital Ratio		Conservation		Depository
	March 31, 2020		December 31, 2019		Requirements		Buffer		Institution
Total capital (to risk-weighted assets)
Consolidated	22.44	%	22.01	%	N/A		N/A		N/A
Bank	20.86	%	20.40	%	8.00	%	10.50	%	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	21.75	%	21.31	%	N/A		N/A		N/A
Bank	20.17	%	19.70	%	6.00	%	8.50	%	8.00	%
CETI capital (to risk-weighted assets)
Consolidated	21.75	%	21.31	%	N/A		N/A		N/A
Bank	20.17	%	19.70	%	4.50	%	7.00	%	6.50	%
Tier 1 capital (to average assets)
Consolidated	13.40	%	12.70	%	N/A		N/A		N/A
Bank	12.42	%	11.74	%	4.00	%	4.00	%	5.00	%

Dividends

On April 15, 2020, we declared a cash dividend of $0.11 per share, payable on May 8, 2020, to common shareholders of record as of May 1, 2020. Any future determination to pay dividends to holders of our common stock will depend on

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our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.

See Note 9 to our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of March 31, 2020 and December 31, 2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.

Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

Our board of directors establishes broad policy limits with respect to interest rate risk. As part of this policy the asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower

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net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

Evaluation of Interest Rate Risk

We use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a two year simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities.

There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Bank’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Bank’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.

Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Bank to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run three standard and plausible comparing current or flat rates with a +/- 200 basis point ramp in rates over 12 months. These rate scenarios are considered appropriate as they are neither too modest (e.g. +/- 100 basis points) or too extreme (e.g. +/- 400 basis points) given the economic and rate cycles which have unfolded in the last 25 years. This analysis also provides the foundation for historical tracking of interest rate risk.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2020 and December 31, 2019 are presented in the following table:


	Net Interest Income Sensitivity
	12 Month Projection				24 Month Projection
(Shock in basis points)	+200		-100		+200		-100
March 31, 2020	5.80	%	2.60	%	7.20	%	4.10	%
December 31, 2019	5.00	%	(1.30)	%	6.10	%	(1.30)	%

We also model the impact of rate changes on our Economic Value of Equity, or EVE. We base the modeling of EVE based on interest rate shocks as shocks are considered more appropriate for EVE, which accelerates future interest rate risk into current capital via a present value calculation of all future cashflows from the bank’s existing inventory of assets and liabilities. Our simulation model incorporates interest rate shocks of +/- 100, 200, and 300 basis points. The results of the model are presented in the table below:


	Economic Value of Equity Sensitivity
(Shock in basis points)	+300		+200		+100		-100
March 31, 2020	5.10	%	5.20	%	3.10	%	(6.70)	%
December 31, 2019	3.40	%	4.20	%	3.50	%	(3.10)	%

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Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

In addition to interest rate risk, the recent COVID-19 pandemic and the related stay-at-home and self-distancing mandates will likely expose us to additional market value risk. Protracted closures, furloughs and lay-offs have curtailed economic activity, and will likely continue to curtail economic activity and could result in lower fair values for collateral in our loan portfolio.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act as of March 31, 2020. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2020.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2020, there was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a‑15 or 15d‑15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to various legal proceedings such as claims and lawsuits arising in the course of our normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of 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 our business, results of operations or financial condition.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in "Part I - Item IA - Risk Factors” of the Company’s 2019 Form 10-K which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. In addition, these may be heightened by the disruption and uncertainty resulting from COVID-19. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.

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Other than the risk factors set forth below related to COVID-19, there have been no material changes in the risk factors discussed in "Part I - Item IA - Risk Factors” of the Company’s 2019 Form 10-K.

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

employees contracting COVID-19;

a work stoppage, forced quarantine, or other interruption of the Company’s business;

unavailability of key personnel necessary to conduct the Company’s business activities;

sustained closures of the Bank’s branch lobbies or the offices of the Bank’s customers;

declines in demand for loans and other banking services and products;

reduced consumer spending due to both job losses and other effects attributable to the pandemic;

unprecedented volatility in United States financial markets;

volatile performance of the Company’s investment securities portfolio;

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;

declines in collateral values;

third party disruptions, including outages at network providers and other suppliers;

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

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The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, any adverse results from current or future litigation related to COVID-19 as a result of our participation in and execution of government programs related to COVID-19, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole.

The COVID-19 pandemic has resulted in significant market volatility and lower interest rates that could materially affect the Company’s results of operations and access to capital.

The COVID-19 pandemic has also caused significant recent volatility in financial markets and adverse economic conditions and may have significant long-term adverse effects on the U.S. economy, including increased instability in capital markets, declines in business and consumer confidence, reductions in economic activity, increased unemployment and recession. This may result in decreased capital and liquidity. If the economic situation deteriorates, federal and state regulators may also consider taking actions such as suspension of dividends, share repurchases and other capital distributions in order to conserve capital and retain capacity, any of which could adversely impact the Company’s business. Further, sustained adverse effects from the COVID-19 pandemic may also prevent us from satisfying our regulatory and other supervisory requirements or result in downgrades in our credit ratings making it more difficult to access the capital markets.

Additionally, the economic disruption caused by COVID-19 has resulted in a number of Federal Reserve actions resulting in market interest rates declining significantly. We expect that these reductions in interest rates, especially if prolonged, could adversely affect the Company’s net interest income, net interest margins and profitability. Furthermore, such low rates increase the risk of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. Such an occurrence would likely further reduce the interest the Company earns on loans and other earning assets, while also likely requiring the Company to pay to maintain its deposits with the Federal Reserve Bank. The Company’s systems may not be able to handle adequately a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. The Company cannot predict the nature or timing of future changes in monetary policies in response to COVID-19 or the precise effects that they may have on the Company’s activities and financial results.

The COVID-19 pandemic has impacted, and will likely continue to impact, the Company’s operations.

As a result of the COVID-19 pandemic, the Company has taken significant precautions to ensure the health and safety of its employees and customers, which include operating our branches as drive-thru and appointment only branches and having our employees working remotely. These precautions could impact demand for the Company’s products and services. The increased reliance on remote access to information systems increases the Company’s exposure to potential cybersecurity breaches and could impact the Company’s productivity. Additionally, the Company’s business customers are increasingly required to work remotely as well and may not have appropriately secured remote networks, which may make us more vulnerable to cyber-attacks or phishing schemes. Furthermore, if a large proportion of the Company’s key employees were to contract COVID-19 or be quarantined as a result of the virus, the Company’s operations could be adversely impacted and its business continuity plans may not prove effective.

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In addition, federal, state and local governments have mandated or encouraged financial services companies to make accommodations to borrowers and other customers affected by the COVID-19 pandemic. Legal and regulatory responses to concerns about the COVID-19 pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. In addition to the potential affects from negative economic conditions noted above, the Company instituted certain programs to help COVID-19 impacted customers, including offering payment deferment and other loan relief, as appropriate, for customers impacted by COVID-19. The Company’s liquidity could be negatively impacted if a significant number of customers apply and are approved for the deferral of payments. In addition, if these deferrals are not effective in mitigating the effect of COVID-19 on the Company’s customers, it may adversely affect its business and results of operations more substantially over a longer period of time.

As a participating lender in the Small Business Administration’s Paycheck Protection Program, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Legislation providing an additional $320 billion in funding for the PPP was signed into law on April 24, 2020. The SBA began accepting applications for the new funding on April 27, 2020.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

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Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description of Exhibit

3.1		Restated Articles of Incorporation of MetroCity Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed September 4, 2019 (File No. 333-233625)
3.2		Amended and Restated Bylaws of MetroCity Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed September 4, 2019 (File No. 333-233625)
31.1		Certification of Chief Executive Officer pursuant to Rules 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Rules 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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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.

	METROCITY BANKSHARES, INC.

Date: May 15, 2020	By:	/s/ Nack Y. Paek
		Nack Y. Paek
		Chief Executive Officer

Date: May 15, 2020	By:	/s/ Farid Tan
		Farid Tan
		President and Chief Financial Officer

MetroCity Bankshares, Inc. - FORM 10-Q - May 15, 2020

Attached files

MetroCity Bankshares, Inc. Reports