PRESIDENT’S MESSAGE TO SHAREHOLDERS OF INTEGRITY BANK FOR BUSINESSMay 2, 2024 This year has been and will continue to be a year of transition for our Bank. First, after the limiting impact on Integrity’s core thoughtful growth from rapidly rising interest rates and market uncertainty arising out of the collapses of both Silicon Valley Bank and Signature Bank in March 2023, we have been restructuring our balance sheet to account for these events and to create an even stronger Bank. We increased our already high level of liquidity even more to clearly show our financial strength and resiliency to existing and prospective clients. At March 31, 2024, Integrity had a coverage ratio of 169% of cash and securities to uninsured deposits, well in excess of these ratios for our local community bank competitors. That is what you would expect of a bank like Integrity with a “fortress balance sheet” that we believe is “Too Strong to Fail”. This high level of liquidity positions Integrity to quickly address any rapid material increases or decreases in financial market interest rates. Second, we have been very active with our balance sheet management over the past year to best position Integrity for the future. We recognize the difficulty that you may have following our progress just by analyzing simple quarter-end and year-end data. As a business bank, Integrity will always have significant fluctuations in deposit balances in the ordinary course of business. These fluctuations often stem from (1) single large deposits or withdrawals, (2) the seasonality of certain clients’ business accounts, and (3) quarterly or annual transactions or distributions to the owners of various clients. One example of these types of deposit balance fluctuations occurred at 2023 year-end for one core client in the ordinary course of business. That core client received a very large multi-million dollar deposit into the client’s account at 2023 year-end and disbursed these funds early in 2024, resulting in what appears as a significant decrease in our deposit balances at 2023 year-end to March 2024 quarter-end. This is what happens regularly at small business banks in the ordinary course of business and makes it very hard for our shareholders to follow our progress from quarter to quarter. Similarly, comparing our loan balances from one quarter to the next can be misleading from the origination or repayment of several loans. Our outstanding loan balance was $39.7 million as of September 30, 2023; $36.3 million as of December 31, 2023; and $39.9 million as of March 31, 2024. Obviously, these numbers do not show any discernible trend over the nine months. Beneath the surface, however, we are continuing our efforts to make our loan portfolio consist primarily of relationship loans without pursuing lending-only relationships. Relationship lending means, of course, that the client or prospect already has or will bring substantial deposit balances to the Bank. Regarding balance sheet management, certain balances do show some of the evolution of our Bank. For the calendar quarter ending March 31, 2024, we had average assets of $82.0 million compared to average assets of $94.8 million for the calendar quarter ending March 31, 2023. On the surface, this decline of $12.8 million in our average assets over the past year would appear very concerning. However, in contrast, we had a net loss of only $93,000 for the first quarter of 2024 compared to a net loss of $173,000 in the first quarter of 2023. This reduction in our quarterly net loss was primarily the result of our thoughtful balance sheet and expense management. Furthermore, despite this year over year decrease in our average quarterly assets, this management of our balance sheet to reflect core deposits and relationship lending resulted in an increase in our first calendar quarter net interest income from $628 thousand in 2023 to $694 thousand in 2024, an increase of 10.5% in our net interest income over the past year even after decreasing our average assets by $12.8 million, showing more efficient usage of our balance sheet. In addition, we are being very active searching for new teammates that will help us grow faster. Integrity has a very precise business development plan focused on core deposits and relationship lending. We are being deliberate in this recruitment process to ensure that new teammates share our vision for our Bank and our commitment to relationship lending and core deposit growth rather than purely transactional banking. Third, there will be substantial changes in our executive management over the next six months, just as we had expected when Integrity opened for business. Ms. Eleanor Bolick, our Loan Administration Manager, has announced that she will retire on May 31st. Eleanor served in this capacity at each of the three banks of which I have been Chief Executive Officer, and Eleanor has been an integral part of my efforts to have excellent asset quality at each of these Banks. Eleanor agreed to join Integrity for three years back in early 2021 to help us establish and implement at Integrity appropriate loan origination and loan administration practices and procedures to recreate for Integrity the asset quality protections that we had implemented at our previous Banks. In addition, Ms. Anne Vanderberry, our Chief Financial Officer, has announced her intention to retire on September 30th. Anne served ably in this capacity at my prior Bank as well as Integrity. She joined our founding group in 2020 to help prepare our regulatory applications to open Integrity, and thereafter Anne put into place over the past three years the financial policies, procedures, and practices for Integrity to operate financially in the safe and sound manner to which we aspired. Once again, Anne had agreed to join our founding group with the expectation that she would serve as the Chief Financial Officer of Integrity until after the expiration of our special supervisory period as a new Bank on June 30th. All of us respect and appreciate what Eleanor and Anne have done to help create Integrity and to make Integrity a model for safety and soundness for a new Bank. Integrity will incur additional compensation expense over the next two calendar quarters from the transition of these two senior positions to new employees and the overlapping staffing of these positions. In addition, our core annual compensation expense will increase in April from our regular merit and cost of living salary increases for our employees. We watch compensation expense closely as the primary non-interest operating expense of any bank, but we strive to compensate appropriately our limited number of excellent employees. In closing, the challenges of the past year caused us to intensify our focus on growing our core deposits and relationship lending. While this has been difficult, this has made Integrity a fundamentally better Bank. Our focus has never been as precise as it is today, and we are now even more excited about Integrity’s future prospects. Mike Michael S. Ives
|