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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, 2024

OR

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

For the transition period from _______ to _______

Commission File Number 001-39068

METROCITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Georgia

47-2528408

(State or other jurisdiction 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

As of May 1, 2024, the registrant had 25,205,506 shares of common stock, par value $0.01 per share, issued and outstanding.

METROCITY BANKSHARES, INC.

Quarterly Report on Form 10-Q

March 31, 2024

TABLE OF CONTENTS

    

Page

Part I.

Financial Information

Item l.

Financial Statements:

Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

3

Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2024 and 2023

4

Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2024 and 2023

5

Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2024 and 2023

6

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2024 and 2023

7

Notes to Consolidated Financial Statements (unaudited)

9

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

53

Item 4.

Controls and Procedures

54

Part II.

Other Information

Item 1.

Legal Proceedings

55

Item 1A.

Risk Factors

55

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

55

Item 3.

Defaults Upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

56

Item 6.

Exhibits

56

Signatures

57

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

METROCITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

March 31, 

December 31, 

    

2024

    

2023

(Unaudited)

Assets:

 

 

  

Cash and due from banks

$

254,331

$

142,152

Federal funds sold

 

4,505

 

2,653

Cash and cash equivalents

 

258,836

 

144,805

Equity securities

10,288

10,335

Securities available for sale

 

18,057

 

18,493

Loans held for sale

 

72,610

 

22,267

Loans, less allowance for credit losses of $17,982 and $18,112, respectively

 

3,097,889

 

3,123,993

Accrued interest receivable

 

15,686

 

15,125

Federal Home Loan Bank stock

 

19,063

 

17,846

Premises and equipment, net

 

18,081

 

18,132

Operating lease right-of-use asset

 

8,030

 

8,472

Foreclosed real estate, net

1,452

1,466

SBA and USDA servicing asset

 

7,611

 

7,251

Mortgage servicing asset, net

 

937

 

1,273

Bank owned life insurance

 

71,492

 

70,957

Interest rate derivatives

38,682

31,781

Other assets

 

8,505

 

10,627

Total assets

$

3,647,219

$

3,502,823

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Non-interest-bearing demand

$

546,760

$

512,045

Interest-bearing

 

2,267,098

 

2,218,891

Total deposits

 

2,813,858

 

2,730,936

Federal Home Loan Bank advances

350,000

325,000

Operating lease liability

 

8,189

 

8,651

Accrued interest payable

 

3,059

 

4,133

Other liabilities

 

75,509

 

52,586

Total liabilities

$

3,250,615

$

3,121,306

Shareholders' Equity:

 

  

 

  

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding

Common stock, $0.01 par value, 40,000,000 shares authorized, 25,205,506 shares issued and outstanding as of March 31, 2024 and December 31, 2023

252

252

Additional paid-in capital

 

46,105

 

45,699

Retained earnings

 

324,900

 

315,356

Accumulated other comprehensive income

 

25,347

 

20,210

Total shareholders' equity

 

396,604

 

381,517

Total liabilities and shareholders' equity

$

3,647,219

$

3,502,823

See accompanying notes to unaudited consolidated financial statements.

3

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

March 31, 

    

2024

    

2023

Interest and dividend income:

  

  

Loans, including fees

$

50,117

$

43,982

Other investment income

 

2,211

 

1,939

Federal funds sold

 

30

 

44

Total interest income

 

52,358

 

45,965

Interest expense:

Deposits

 

22,105

 

17,376

FHLB advances and other borrowings

 

3,168

 

2,356

Total interest expense

 

25,273

 

19,732

Net interest income

 

27,085

 

26,233

Provision for credit losses

 

(140)

 

Net interest income after provision for credit losses

 

27,225

 

26,233

Noninterest income:

Service charges on deposit accounts

 

447

 

449

Other service charges, commissions and fees

 

1,612

 

874

Gain on sale of residential mortgage loans

 

222

 

Mortgage servicing income, net

 

229

 

(96)

Gain on sale of SBA loans

 

1,051

 

1,969

SBA servicing income, net

 

1,496

 

1,814

Other income

 

511

 

1,134

Total noninterest income

 

5,568

 

6,144

Noninterest expense:

Salaries and employee benefits

 

7,370

 

6,366

Occupancy and equipment

 

1,354

 

1,214

Data processing

 

294

 

275

Advertising

 

172

 

146

Other expenses

 

3,171

 

2,806

Total noninterest expense

 

12,361

 

10,807

Income before provision for income taxes

 

20,432

 

21,570

Provision for income taxes

 

5,801

 

5,840

Net income available to common shareholders

$

14,631

$

15,730

Earnings per share:

Basic

$

0.58

$

0.63

Diluted

$

0.57

$

0.62

See accompanying notes to unaudited consolidated financial statements.

4

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

Three Months Ended

March 31, 

    

2024

    

2023

Net income

$

14,631

$

15,730

Other comprehensive gain (loss):

 

 

  

Unrealized holding (losses) gains on securities available for sale

 

(286)

 

368

Net changes in fair value of cash flow hedges

7,408

(5,134)

Tax effect

 

(1,985)

 

1,254

Other comprehensive gain (loss)

 

5,137

 

(3,512)

Comprehensive income

$

19,768

$

12,218

See accompanying notes to unaudited consolidated financial statements.

5

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)

Accumulated

Common Stock

Additional

Other

Number of

Paid-in

Retained

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Three Months Ended:

Balance, January 1, 2024

 

25,205,506

$

252

$

45,699

$

315,356

$

20,210

$

381,517

Net income

 

 

 

 

14,631

 

 

14,631

Stock based compensation expense

 

 

 

406

 

 

 

406

Other comprehensive income

 

 

 

 

 

5,137

 

5,137

Dividends declared on common stock ($0.20 per share)

 

 

 

(5,087)

 

 

(5,087)

Balance, March 31, 2024

 

25,205,506

$

252

$

46,105

$

324,900

$

25,347

$

396,604

Balance, January 1, 2023

 

25,169,709

$

252

$

45,298

$

285,832

$

18,039

$

349,421

Net income

 

 

 

 

15,730

 

 

15,730

Stock based compensation expense

 

 

 

298

 

 

 

298

Repurchase of common stock

(26,034)

(1)

(552)

(553)

Impact of adoption of new accounting standard, net of tax(1)

(3,865)

(3,865)

Other comprehensive loss

 

 

 

 

(3,512)

 

(3,512)

Dividends declared on common stock ($0.18 per share)

 

 

 

(4,558)

 

 

(4,558)

Balance, March 31, 2023

 

25,143,675

$

251

$

45,044

$

293,139

$

14,527

$

352,961

(1)Represents the impact of the adoption of Accounting Standards Update ("ASU") No. 2016-13: CECL.

See accompanying notes to unaudited consolidated financial statements.

6

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

Three Months Ended March 31, 

    

2024

    

2023

Cash flow from operating activities:

 

  

 

  

Net income

$

14,631

$

15,730

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and accretion

 

752

 

705

Provision for credit losses

 

(140)

 

Stock based compensation expense

 

406

 

298

Unrealized losses recognized on equity securities

47

(128)

(Gain) loss on sale of foreclosed real estate

 

 

(547)

Writedown of foreclosed real estate

14

Gain on sale of residential real estate loans

 

(222)

 

Origination of SBA loans held for sale

 

(24,631)

 

(36,969)

Proceeds from sales of SBA loans held for sale

 

25,682

 

38,938

Gain on sale of SBA loans

 

(1,051)

 

(1,969)

Increase in cash value of bank owned life insurance

 

(535)

 

(435)

Increase in accrued interest receivable

 

(561)

 

(471)

Increase in SBA and USDA servicing rights

 

(360)

 

(706)

Decrease in mortgage servicing rights

 

336

 

768

Decrease (increase) in other assets

 

168

 

(33)

(Decrease) increase in accrued interest payable

 

(1,074)

 

942

Increase in other liabilities

 

22,897

 

9,410

Net cash flow provided by operating activities

 

36,359

 

25,533

Cash flow from investing activities:

 

  

 

  

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

 

134

 

421

Purchase of Federal Home Loan Bank stock

 

(1,217)

 

(166)

Proceeds from sales of residential real estate loans

 

22,489

 

(Increase) decrease in loans, net

(46,372)

 

43,673

Purchases of premises and equipment

 

(243)

 

(1,162)

Proceeds from sales of foreclosed real estate owned

4,109

Net cash flow (used) provided by investing activities

 

(25,209)

 

46,875

Cash flow from financing activities:

 

  

 

  

Dividends paid on common stock

 

(5,041)

 

(4,526)

Repurchases of common stock

(553)

Increase (decrease) in deposits, net

 

82,922

 

(22,745)

Decrease in other borrowings, net

 

 

(5)

Proceeds from Federal Home Loan Bank advances

75,000

125,000

Repayments of Federal Home Loan Bank advances

 

(50,000)

 

(125,000)

Net cash flow provided (used) by financing activities

 

102,881

 

(27,829)

Continued to following page.

7

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

Three Months Ended March 31, 

    

2024

    

2023

Net change in cash and cash equivalents

 

114,031

 

44,579

Cash and cash equivalents at beginning of period

 

144,805

 

179,485

Cash and cash equivalents at end of period

$

258,836

$

224,064

Supplemental schedule of noncash investing and financing activities:

Transfer of residential real estate loans to loans held for sale

$

72,610

$

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

Interest

$

26,347

$

18,790

Income taxes

$

225

$

686

See accompanying notes to unaudited consolidated financial statements.

8

METROCITY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements include the accounts of MetroCity Bankshares, Inc. (“Company”) and its wholly-owned subsidiary, Metro City Bank (the “Bank”). The Company owns 100% of the Bank. The “Company” or “our,” as used herein, includes Metro City Bank unless the context indicates that we refer only to MetroCity Bankshares, Inc.

These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) followed within the financial services industry for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements.

The Company principally operates in one business segment, which is community banking.

In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.

Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2023.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2023, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “Company’s 2023 Form 10-K”). There were no new accounting policies or changes to existing policies adopted during the first three months of 2024 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Contingencies

Due to the nature of their activities, the Company and its subsidiary are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of March 31, 2024. Although the ultimate outcome of all claims and lawsuits outstanding as of March 31, 2024 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.

Recently Issued Disclosure Rules

In March 2024, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. The disclosure requirements will apply to the Company's fiscal year beginning January 1, 2026. The Company is currently evaluating the final rule to determine its impact on the Company's disclosures.

The Company has evaluated the Accounting Standards Updates issued during 2024 to date but does not expect those updates to have a material impact on the consolidated financial statements.

9

Accounting Standards Adopted in 2023

In January 2023, the Company adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the incurred loss approach with an expected loss model, referred to as the current expected credit loss (“CECL”) model. The new standard applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. ASU 2016-13 simplifies the accounting for purchased credit-impaired debt securities and loans and expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses. In addition, under the new standard, entities are required to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 was effective for interim and annual reporting periods beginning after December 15, 2022. With its adoption, ASU 2016-13 provided for a modified retrospective transition by means of a cumulative effect adjustment to equity as of the beginning of the period in which the guidance was effective.

The Company adopted ASU 2016-13 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach. The adoption of this standard resulted in an increase to the allowance for credit losses on loans of $5.1 million and the creation of an allowance for unfunded commitments of $239,000. These one-time cumulative adjustments resulted in a $3.8 million decrease to retained earnings, net of a $1.5 million increase to deferred tax assets.

For available for sale (“AFS”) securities, the new CECL methodology replaced the other-than-temporary impairment model and required the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline was determined to be other-than-temporary. There was no financial impact related to this implementation since the credit risk associated with our securities portfolio was minimal. The Company has made a policy election to exclude accrued interest from the amortized cost basis of AFS securities. Accrued interest receivable for AFS securities totaled $78,000 and $115,000 as of March 31, 2024 and December 31, 2023, respectively. This accrued interest receivable is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio or are considered collateral dependent. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics. See Note 3 below for further details.

The following new accounting policies were adopted during 2023:

Allowance for Credit Losses – Available for Sale Securities

The impairment model for available for sale (“AFS”) securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASU 2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the

10

aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. As of March 31, 2024, the Company determined that the unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note 2 below for further details.

Allowance for Credit Losses - Loans

Under the CECL model, the allowance for credit losses (“ACL”) on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying loans’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the allowance for credit losses through a charge to provision for credit losses. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Loans are charged off against the ACL when management believes the collection of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the ACL when received.

The Company measures expected credit losses of loans on a collective (pool) basis, when the loans share similar risk characteristics. Depending on the nature of the pool of loans with similar risk characteristics, the Company uses the discounted cash flow (“DCF”) method and a qualitative approach as discussed further below.

The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for loan-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the loans that are reasonable and supportable, to the identified pools of loans with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to historical loss information on a straight-line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.

The Company has identified the following pools of loans with similar risk characteristics for measuring expected credit losses:

Construction and development – Loans in this segment primarily include real estate development loans for which payment is derived from the sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial real estate – Loans in this segment are primarily income-producing properties. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans. This loan segment includes farmland loans.

11

Commercial and industrial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased customer spending, will have an effect on the credit quality in this segment.

Single family residential mortgages – Loans in this segment include loans for residential real estate. Loans in this segment are dependent on credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality of this segment.

Consumer and other – Loans in this segment are made to individuals and are secured by personal assets, as well as loans for personal lines of credit and overdraft protection. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality in this segment.

Discounted Cash Flow Method

The Company uses the discounted cash flow method to estimate expected credit losses for each of its loan segments. The Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on benchmark peer data.

The Company uses regression analysis of peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, the Company uses national data including gross domestic product, unemployment rates and home price indices (residential mortgage loans only) depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

Qualitative Factors

The Company also considers qualitative adjustments to the quantitative baseline discussed above. For example, the Company considers the impact of current environmental factors at the reporting date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), changes in underwriting standards, changes in collateral value, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.

Individually Analyzed Loans

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral,

12

expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

Allowance for Unfunded Commitments

The Company records an allowance for credit losses on unfunded loan commitments, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s Consolidated Statements of Income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur. The allowance for unfunded commitments totaled $310,000 and $315,000 as of March 31, 2024 and December 31, 2023, respectively, and is included in Other Liabilities on the Company’s Consolidated Balance Sheets.  

NOTE 2 – INVESTMENT SECURITIES

The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale as of March 31, 2024 and December 31, 2023 are summarized as follows:

March 31, 2024

    

Gross

    

Gross

    

Gross

    

Estimated

Amortized

Unrealized

Unrealized

Fair

(Dollars in thousands)

Cost

Gains

Losses

Value

Obligations of U.S. Government entities and agencies

$

4,595

$

$

$

4,595

States and political subdivisions

 

8,060

 

 

(1,369)

 

6,691

Mortgage-backed GSE residential

 

8,573

 

(1,802)

 

6,771

Total

$

21,228

$

$

(3,171)

$

18,057

December 31, 2023

    

Gross

    

Gross

    

Gross

    

Estimated

Amortized

Unrealized

Unrealized

Fair

(Dollars in thousands)

Cost

Gains

Losses

Value

Obligations of U.S. Government entities and agencies

$

4,637

$

$

$

4,637

States and political subdivisions

 

8,072

 

 

(1,290)

 

6,782

Mortgage-backed GSE residential

 

8,669

 

 

(1,595)

 

7,074

Total

$

21,378

$

$

(2,885)

$

18,493

The amortized costs and estimated fair values of investment securities available for sale at March 31, 2024 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities Available for Sale

    

Amortized

    

Estimated

(Dollars in thousands)

Cost

Fair Value

Due in one year or less

$

$

Due after one year but less than five years

 

5,835

5,807

Due after five years but less than ten years

 

Due in more than ten years

 

6,820

5,479

Mortgage-backed GSE residential

 

8,573

6,771

Total

$

21,228

$

18,057

13

Accrued interest receivable for securities available for sale totaled $78,000 and $115,000 as of March 31, 2024 and December 31, 2023, respectively. This accrued interest receivable is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.

As of March 31, 2024 and December 31, 2023, the Company had securities pledged to the Federal Reserve Bank Discount Window with a carrying amount of $13.5 million and $13.9 million, respectively. There were no securities sold during the three months ended March 31, 2024 and 2023.

Information pertaining to securities with gross unrealized losses at March 31, 2024 and December 31, 2023 aggregated by investment category and length of time that individual securities have been in a continuous loss position, are summarized in the table below.

March 31, 2024

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

$

$

$

1,369

$

6,691

Mortgage-backed GSE residential

1,802

6,771

Total

$

$

$

3,171

$

13,462

 

December 31, 2023

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

$

$

$

1,290

$

6,782

Mortgage-backed GSE residential

1,595

7,074

Total

$

$

$

2,885

$

13,856

 

At March 31, 2024, the nineteen securities available for sale (11 municipal securities and 8 mortgage-backed securities) with an unrealized loss have depreciated 19.07% from the Company’s amortized cost basis. All of these securities have been in a loss position for greater than twelve months.

The Company does not believe that the securities available for sale that were in an unrealized loss position as of March 31, 2024 represent a credit loss impairment.  As of March 31, 2024, there have been no payment defaults nor do we currently expect any future payment defaults. Furthermore, the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

Equity Securities

As of both March 31, 2024 and December 31, 2023, the Company had equity securities with carrying values totaling $10.3 million. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts.

During the three months ended March 31, 2024 and 2023, we recognized an unrealized loss of $47,000 and an unrealized gain on $128,000, respectively, in net income on our equity securities. These unrealized gains and losses are recorded in Other Income on the Consolidated Statements of Income.

14

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Major classifications of loans at March 31, 2024 and December 31, 2023 are summarized as follows:

    

March 31, 

    

December 31, 

(Dollars in thousands)

 

2024

 

2023

Construction and development

$

27,762

$

23,262

Commercial real estate

 

724,263

 

711,177

Commercial and industrial

 

68,560

 

65,904

Residential real estate

 

2,303,400

 

2,350,299

Consumer and other

 

247

 

319

  Total loans receivable

 

3,124,232

 

3,150,961

Unearned income

 

(8,361)

 

(8,856)

Allowance for credit losses

 

(17,982)

 

(18,112)

  Loans, net

$

3,097,889

$

3,123,993

The Company is not committed to lend additional funds to borrowers with nonaccrual or restructured loans.

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

The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this note. As of March 31, 2024 and December 31, 2023, accrued interest receivable for loans totaled $15.6 million and $15.0 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.

Allowance for Credit Losses

As previously mentioned in Note 1, the Company’s January 1, 2023 adoption of ASU 2016-13 resulted in a significant change to our methodology for estimating the allowance for credit losses since December 31, 2022. As a result of this adoption, the Company recorded a $5.1 million increase to the allowance for credit losses as a cumulative-effect adjustment on January 1, 2023.

A summary of changes in the allowance for credit losses by portfolio segment for the three months ended March 31, 2024 and 2023 is as follows:

 

Three Months Ended March 31, 2024

Construction

 

and

 

Commercial 

 

Commercial

 

Residential

Consumer

(Dollars in thousands)

    

Development

    

Real Estate

    

and Industrial

    

Real Estate

    

and Other

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

$

46

$

6,876

$

588

$

10,597

$

5

$

$

18,112

Charge-offs