GRANDSOUTH
BANCORPORATION AND SUBSIDIARY
Consolidated
Balance Sheets
| |
(Unaudited) | | |
(Audited) | |
(in
thousands, except share data) | |
June
30, 2022 | | |
December
31, 2021 | |
Assets | |
| | | |
| | |
| |
| | | |
| | |
Cash
and due from banks | |
$ | 5,036 | | |
$ | 2,522 | |
Interest-earning
deposits | |
| 136,041 | | |
| 120,602 | |
Federal
funds sold | |
| 1,859 | | |
| 977 | |
Cash
and cash equivalents | |
| 142,936 | | |
| 124,101 | |
| |
| | | |
| | |
Investments
- available for sale | |
| 116,137 | | |
| 111,962 | |
Investments
- held to maturity | |
| 5,990 | | |
| — | |
Other
investments, at cost | |
| 2,626 | | |
| 2,984 | |
Loans
receivable, net of deferred fees and costs | |
| 952,813 | | |
| 933,475 | |
Allowance
for loan losses | |
| (14,100 | ) | |
| (13,723 | ) |
Premises
and equipment, net | |
| 17,655 | | |
| 17,783 | |
Real
estate owned | |
| 842 | | |
| 842 | |
Accrued
interest receivable | |
| 4,746 | | |
| 4,808 | |
Bank
owned life insurance | |
| 14,935 | | |
| 14,778 | |
Net
deferred tax asset | |
| 5,342 | | |
| 2,968 | |
Goodwill | |
| 737 | | |
| 737 | |
Other
assets | |
| 3,373 | | |
| 3,007 | |
| |
| | | |
| | |
Total
assets | |
$ | 1,254,032 | | |
$ | 1,203,722 | |
| |
| | | |
| | |
Liabilities
and Shareholders’ Equity | |
| | | |
| | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Deposits: | |
| | | |
| | |
Noninterest-bearing | |
$ | 301,487 | | |
$ | 280,665 | |
Interest-bearing | |
| 809,614 | | |
| 778,376 | |
Total
deposits | |
| 1,111,101 | | |
| 1,059,041 | |
Federal
Home Loan Bank advances | |
| 5,000 | | |
| 5,000 | |
Junior
subordinated notes | |
| 35,924 | | |
| 35,864 | |
Accrued
interest payable | |
| 254 | | |
| 383 | |
Accrued
expenses and other liabilities | |
| 5,632 | | |
| 6,029 | |
Total
liabilities | |
| 1,157,911 | | |
| 1,106,317 | |
| |
| | | |
| | |
Commitments
and contingencies (Notes 13 and 23) | |
| | | |
| | |
| |
| | | |
| | |
Shareholders’
Equity: | |
| | | |
| | |
Preferred
stock - Series A - no par value; 287,895 shares authorized, 282,828 shares issued, and outstanding as of June 30, 2022 and December 31, 2021 | |
| — | | |
| — | |
Common
stock - no par value; 20,000,000 shares authorized; 5,209,542 and 5,168,681 shares issued and outstanding as
of June 30, 2022 and December 31, 2021, respectively | |
| — | | |
| — | |
Additional
paid in capital | |
| 45,424 | | |
| 44,570 | |
Retained
earnings | |
| 58,026 | | |
| 51,649 | |
Accumulated
other comprehensive income | |
| (7,329 | ) | |
| 1,186 | |
Total
shareholders’ equity | |
| 96,121 | | |
| 97,405 | |
Total
liabilities and shareholders’ equity | |
$ | 1,254,032 | | |
$ | 1,203,722 | |
| |
| | | |
| | |
The accompanying
notes are an integral part of the consolidated financial statements.
GRANDSOUTH
BANCORPORATION AND SUBSIDIARY
Consolidated
Statements of Income (Unaudited)
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
(in
thousands, except per share data) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Interest
income: | |
| | | |
| | | |
| | | |
| | |
Interest
and fees on loans | |
$ | 13,764 | | |
$ | 12,909 | | |
$ | 27,345 | | |
$ | 26,047 | |
Taxable
securities | |
| 533 | | |
| 358 | | |
| 999 | | |
| 626 | |
Tax-exempt
securities | |
| 69 | | |
| 70 | | |
| 138 | | |
| 140 | |
Interest-earning
deposits | |
| 218 | | |
| 23 | | |
| 258 | | |
| 42 | |
Other | |
| 14 | | |
| 31 | | |
| 29 | | |
| 65 | |
Total
interest income | |
| 14,598 | | |
| 13,391 | | |
| 28,769 | | |
| 26,920 | |
| |
| | | |
| | | |
| | | |
| | |
Interest
expense: | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 758 | | |
| 803 | | |
| 1,445 | | |
| 1,796 | |
Federal
Home Loan Bank advances | |
| 5 | | |
| 36 | | |
| 10 | | |
| 71 | |
Junior
subordinated notes | |
| 450 | | |
| 432 | | |
| 883 | | |
| 865 | |
Total
interest expense | |
| 1,213 | | |
| 1,271 | | |
| 2,338 | | |
| 2,732 | |
Net
interest income | |
| 13,385 | | |
| 12,120 | | |
| 26,431 | | |
| 24,188 | |
Provision
for loan losses | |
| 119 | | |
| 309 | | |
| 427 | | |
| 551 | |
Net
interest income after provision for loan losses | |
| 13,266 | | |
| 11,811 | | |
| 26,004 | | |
| 23,637 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest
income: | |
| | | |
| | | |
| | | |
| | |
Service
charges on deposit accounts | |
| 368 | | |
| 322 | | |
| 702 | | |
| 590 | |
Bank
owned life insurance | |
| 78 | | |
| 85 | | |
| 157 | | |
| 177 | |
Net
gain on sale of premises and equipment | |
| 12 | | |
| 78 | | |
| 36 | | |
| 84 | |
Other | |
| 179 | | |
| 283 | | |
| 368 | | |
| 492 | |
Total
noninterest income | |
| 637 | | |
| 768 | | |
| 1,263 | | |
| 1,343 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest
expenses: | |
| | | |
| | | |
| | | |
| | |
Compensation
and employee benefits | |
| 5,679 | | |
| 4,987 | | |
| 11,216 | | |
| 10,061 | |
Net
occupancy | |
| 571 | | |
| 584 | | |
| 1,157 | | |
| 1,148 | |
Federal
deposit insurance | |
| 102 | | |
| 172 | | |
| 218 | | |
| 325 | |
Professional
and advisory | |
| 1,177 | | |
| 265 | | |
| 1,407 | | |
| 574 | |
Data
processing | |
| 520 | | |
| 494 | | |
| 1,014 | | |
| 1,027 | |
Marketing
and advertising | |
| 42 | | |
| 35 | | |
| 111 | | |
| 79 | |
Net
cost of operation of real estate owned | |
| 13 | | |
| 19 | | |
| 37 | | |
| 129 | |
Other | |
| 923 | | |
| 847 | | |
| 1,852 | | |
| 1,727 | |
Total
noninterest expenses | |
| 9,027 | | |
| 7,403 | | |
| 17,012 | | |
| 15,070 | |
Income
tax expense | |
| 1,183 | | |
| 1,213 | | |
| 2,454 | | |
| 2,353 | |
| |
| | | |
| | | |
| | | |
| | |
Net
income | |
| 3,693 | | |
| 3,963 | | |
| 7,801 | | |
| 7,557 | |
Preferred
stock dividends | |
| (39 | ) | |
| (30 | ) | |
| (77 | ) | |
| (60 | ) |
Net
income applicable to common shareholders | |
$ | 3,654 | | |
$ | 3,933 | | |
$ | 7,724 | | |
$ | 7,497 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings
per common share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.67 | | |
$ | 0.73 | | |
$ | 1.42 | | |
$ | 1.38 | |
Diluted | |
$ | 0.65 | | |
$ | 0.71 | | |
$ | 1.37 | | |
$ | 1.36 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted
average common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 5,201,806 | | |
| 5,134,112 | | |
| 5,192,202 | | |
| 5,167,763 | |
Diluted | |
| 5,393,637 | | |
| 5,259,588 | | |
| 5,389,183 | | |
| 5,254,908 | |
| |
| | | |
| | | |
| | | |
| | |
The
accompanying notes are an integral part of the consolidated financial statements.
GRANDSOUTH
BANCORPORATION AND SUBSIDIARY
Consolidated
Statements of Comprehensive Income (Unaudited)
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
(in
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net
income | |
$ | 3,693 | | |
$ | 3,963 | | |
$ | 7,801 | | |
$ | 7,557 | |
Other
comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
Change
in unrealized holding gains (losses) on securities available for sale | |
| (4,596 | ) | |
| 1,095 | | |
| (10,888 | ) | |
| (901 | ) |
Income
tax effect related to items of other comprehensive loss | |
| 1,001 | | |
| (238 | ) | |
| 2,373 | | |
| 196 | |
Total
other comprehensive income (loss), after tax | |
| (3,595 | ) | |
| 857 | | |
| (8,515 | ) | |
| (705 | ) |
Comprehensive
income (loss) | |
$ | 98 | | |
$ | 4,820 | | |
$ | (714 | ) | |
$ | 6,852 | |
| |
| | | |
| | | |
| | | |
| | |
The accompanying
notes are an integral part of the consolidated financial statements.
GRANDSOUTH
BANCORPORATION AND SUBSIDIARY
Consolidated
Statements of Changes in Shareholders’ Equity (Unaudited)
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
| | |
| | |
| | |
| | |
Other | | |
| |
| |
Common
Stock | | |
Preferred
Stock | | |
Additional | | |
Retained | | |
Comprehensive | | |
| |
(in
thousands, except share and per share data) | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Paid
in Capital | | |
Earnings | | |
Income
(Loss) | | |
Total | |
Balances
at December 31, 2021 | |
| 5,168,681 | | |
$ | — | | |
| 282,828 | | |
$ | — | | |
$ | 44,570 | | |
$ | 51,649 | | |
$ | 1,186 | | |
$ | 97,405 | |
Net
income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 4,108 | | |
| — | | |
| 4,108 | |
Other
comprehensive loss, net of tax | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,920 | ) | |
| (4,920 | ) |
Stock
compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 130 | | |
| — | | |
| — | | |
| 130 | |
Stock
options exercised | |
| 29,861 | | |
| — | | |
| — | | |
| — | | |
| 418 | | |
| — | | |
| — | | |
| 418 | |
Common
stock dividend ($0.13 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (672 | ) | |
| — | | |
| (672 | ) |
Preferred
stock dividend ($0.1365 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (38 | ) | |
| — | | |
| (38 | ) |
Balances
at March 31, 2022 | |
| 5,198,542 | | |
$ | — | | |
| 282,828 | | |
$ | — | | |
$ | 45,118 | | |
$ | 55,047 | | |
$ | (3,734 | ) | |
$ | 96,431 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,693 | | |
| — | | |
| 3,693 | |
Other
comprehensive loss, net of tax | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,595 | ) | |
| (3,595 | ) |
Stock
compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 144 | | |
| — | | |
| — | | |
| 144 | |
Stock
options exercised | |
| 11,000 | | |
| — | | |
| — | | |
| — | | |
| 162 | | |
| — | | |
| — | | |
| 162 | |
Stock
repurchase | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Common
stock dividend ($0.13 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (675 | ) | |
| — | | |
| (675 | ) |
Preferred
stock dividend ($0.1365 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (39 | ) | |
| — | | |
| (39 | ) |
Balances
at June 30, 2022 | |
| 5,209,542 | | |
$ | — | | |
| 282,828 | | |
$ | — | | |
$ | 45,424 | | |
$ | 58,026 | | |
$ | (7,329 | ) | |
$ | 96,121 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances
at December 31, 2020 | |
| 5,271,971 | | |
$ | — | | |
| 287,895 | | |
$ | — | | |
$ | 46,645 | | |
$ | 37,721 | | |
$ | 2,159 | | |
$ | 86,525 | |
Net
income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,594 | | |
| — | | |
| 3,594 | |
Other
comprehensive loss, net of tax | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,562 | ) | |
| (1,562 | ) |
Stock
compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 155 | | |
| — | | |
| — | | |
| 155 | |
Stock
options exercised | |
| 36,656 | | |
| — | | |
| — | | |
| — | | |
| 460 | | |
| — | | |
| — | | |
| 460 | |
Stock
repurchase | |
| (135,230 | ) | |
| — | | |
| — | | |
| — | | |
| (2,392 | ) | |
| — | | |
| — | | |
| (2,392 | ) |
Common
stock dividend ($0.10 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (527 | ) | |
| — | | |
| (527 | ) |
Preferred
stock dividend ($0.105 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (30 | ) | |
| — | | |
| (30 | ) |
Balances
at March 31, 2021 | |
| 5,173,397 | | |
$ | — | | |
| 287,895 | | |
$ | — | | |
$ | 44,868 | | |
$ | 40,758 | | |
$ | 597 | | |
$ | 86,223 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,963 | | |
| — | | |
| 3,963 | |
Other
comprehensive income, net of tax | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 857 | | |
| 857 | |
Stock
compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 153 | | |
| — | | |
| — | | |
| 153 | |
Stock
options exercised | |
| 29,500 | | |
| — | | |
| — | | |
| — | | |
| 385 | | |
| — | | |
| — | | |
| 385 | |
Stock
repurchase | |
| (75,216 | ) | |
| — | | |
| — | | |
| — | | |
| (1,554 | ) | |
| — | | |
| — | | |
| (1,554 | ) |
Common
stock dividend ($0.10 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (510 | ) | |
| — | | |
| (510 | ) |
Preferred
stock dividend ($0.105 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (30 | ) | |
| — | | |
| (30 | ) |
Balances
at June 30, 2021 | |
| 5,127,681 | | |
$ | — | | |
| 287,895 | | |
$ | — | | |
$ | 43,852 | | |
$ | 44,181 | | |
$ | 1,454 | | |
$ | 89,487 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
The accompanying
notes are an integral part of the consolidated financial statements.
GRANDSOUTH
BANCORPORATION AND SUBSIDIARY
Consolidated
Statements of Cash Flows (Unaudited)
| |
|
|
|
|
|
| |
| |
For
the Six Months Ended June 30, | |
(in
thousands) | |
2022 | | |
2021 | |
Cash
flows from operating activities: | |
| | | |
| | |
Net
income | |
$ | 7,801 | | |
$ | 7,557 | |
Adjustments
to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation,
amortization and accretion | |
| 724 | | |
| 722 | |
Investment
amortization, net | |
| 415 | | |
| 678 | |
Provision
for loan losses | |
| 427 | | |
| 551 | |
Provision
for real estate owned | |
| — | | |
| 87 | |
Stock-based
compensation expense | |
| 274 | | |
| 308 | |
Income
on bank owned life insurance, net | |
| (157 | ) | |
| (177 | ) |
Gain
on sale of fixed assets | |
| (36 | ) | |
| (84 | ) |
Net
change in operating assets and liabilities: | |
| | | |
| | |
Accrued
interest receivable | |
| 62 | | |
| 209 | |
Other
assets | |
| (366 | ) | |
| (1,788 | ) |
Accrued
interest payable | |
| (129 | ) | |
| (64 | ) |
Other
liabilities | |
| (397 | ) | |
| 832 | |
Net
cash provided by operating activities | |
| 8,618 | | |
| 8,831 | |
| |
| | | |
| | |
Cash
flows from investing activities: | |
| | | |
| | |
Activity
for investment securities available for sale: | |
| | | |
| | |
Purchases | |
| (27,225 | ) | |
| (37,013 | ) |
Maturities/calls
and principal repayments | |
| 5,756 | | |
| 14,565 | |
Activity
for investment securities held to maturity: | |
| | | |
| | |
Net
increase in loans | |
| (19,602 | ) | |
| (30,489 | ) |
Redemption
of BOLI policies | |
| — | | |
| 429 | |
Proceeds
from sale of fixed assets | |
| 49 | | |
| 87 | |
Purchase
of fixed assets | |
| (335 | ) | |
| (726 | ) |
Purchase
of other investments, at cost | |
| (142 | ) | |
| — | |
Redemption
of other investments, at cost | |
| 500 | | |
| 2,026 | |
Net
cash used in investing activities | |
| (40,999 | ) | |
| (51,121 | ) |
| |
| | | |
| | |
Cash
flows from financing activities: | |
| | | |
| | |
Net
increase in deposits | |
| 52,060 | | |
| 69,902 | |
Repurchase
of common stock | |
| — | | |
| (3,946 | ) |
Cash
received upon exercise of stock options | |
| 580 | | |
| 845 | |
Dividends
paid on common stock | |
| (1,347 | ) | |
| (1,037 | ) |
Dividends
paid on preferred stock | |
| (77 | ) | |
| (60 | ) |
Net
cash provided by financing activities | |
| 51,216 | | |
| 65,704 | |
Net
change in cash and cash equivalents | |
| 18,835 | | |
| 23,414 | |
Cash
and cash equivalents, beginning of period | |
| 124,101 | | |
| 63,025 | |
Cash
and cash equivalents, end of period | |
$ | 142,936 | | |
$ | 86,439 | |
| |
| | | |
| | |
Supplemental
disclosures of cash flow information: | |
| | | |
| | |
Cash
paid during the year for: | |
| | | |
| | |
Interest
on deposits and other borrowings | |
$ | 1,283 | | |
$ | 2,730 | |
Income
taxes | |
| 3,380 | | |
| 3,072 | |
| |
| | | |
| | |
The accompanying
notes are an integral part of the consolidated financial statements.
GRANDSOUTH
BANCORPORATION AND SUBSIDIARY
Notes to Consolidated
Financial Statements (Unaudited)
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
GrandSouth Bancorporation
(“we,” “us,” “our,” or the “Company”) was incorporated on September 7, 2000 for
the purpose of becoming the holding company for GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to the
Plan of Exchange, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company. The Company’s
primary operation is its investment in the Bank. The Company also owns 100% of the common stock of GrandSouth Capital Trust I
(the “Trust”), a Delaware statutory trust formed in 2006 to facilitate the issuance of trust preferred securities.
The Bank
is a South Carolina state-chartered commercial bank that provides a full range of banking services. The Bank is insured and subject
to the regulation of the Federal Deposit Insurance Corporation (“FDIC”) and is also subject to the regulation of the
South Carolina State Board of Financial Institutions.
Pending Acquisition
As described
in more detail in Note 11 to the consolidated financial statements, on June 21, 2022, the Company entered into an Agreement and
Plan of Merger and Reorganization (the “Merger Agreement”) with First Bancorp, the holding company for First Bank,
Southern Pines, North Carolina, pursuant to which the Company will merge with and into First Bancorp (the “Merger”),
and the Bank will merge with and into First Bank. The parties anticipate closing the Merger during the fourth quarter of 2022
or the first quarter of 2023.
Principles
of Consolidation
The accompanying
consolidated financial statements include the accounts of the Company and the Bank. The accounts of the Trust are not consolidated
with the Company. In consolidation all significant intercompany accounts and transactions have been eliminated.
Business
Segments
Accounting Standards
Codification (“ASC”) Topic 280-10, “Segment Reporting,” requires selected segment information of
operating segments based on a management approach. The Company’s two reportable segments represent the distinct product
lines the Company offers and are viewed separately for strategic planning by management. Please refer to “Note 9 –
Reportable Segments” for further information on the reporting for the Company’s two business segments.
Estimates
The preparation
of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material
estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance
for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation
of deferred tax assets.
Basis of
Presentation
The accompanying
unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles,
or GAAP, for interim financial information. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements and should be read in conjunction with our Form 10-K for the year ended December 31, 2021,
filed with the SEC on March 31, 2022 (the “2021 Form 10-K”). In the opinion of management, these interim financial
statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations
for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results
of operations that may be expected for a full year or any future period.
Reclassification
Certain amounts
in the prior year’s financial statements may have been reclassified to conform to the current year’s presentation.
The reclassifications had no effect on our results of operations or financial condition as previously reported.
Recent Accounting
Standards Updates
In September
2016, the FASB issued amendments to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The amendments in the update require a financial asset (or a group of financial assets) measured
at amortized cost basis to be presented at the net amount expected to be collected thereby providing financial statement users
with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend
credit held by the reporting entity. The amendments will be effective for the Company for reporting periods beginning after December
15, 2022. The Company has formed a cross-functional committee to provide corporate governance over the implementation of this
update, has evaluated data sources and made process updates to capture additional relevant data, has identified a service provider
to perform the calculation, and continues to attend seminars and forums specific to this update. The Company also engaged the
service provider to assist with the implementation of the standard. While we continue to evaluate the impact the new guidance
will have on our financial position and results of operations, we currently expect the new guidance may result in an increase
to our allowance for credit losses given the change to estimated losses over the contractual life of the loan portfolio. The amount
of any change to our allowance will depend, in part, upon the composition of our loan portfolio at the adoption date as well as
economic conditions and loss forecasts at that date.
In August 2021,
the FASB issued amendments to update SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release
No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical
Disclosures for Bank and Savings and Loan Registrants. The amendments were effective upon issuance. These amendments did not have
a material effect on the Company’s financial statements.
Other accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies did not or are not expected to have
a material impact on the Company’s financial position, results of operations or cash flows.
NOTE
2. INVESTMENTS
The amortized
cost and estimated fair values of available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities as
of June 30, 2022 and December 31, 2021 are summarized as follows (in thousands):
Schedule
of Securities Available-For-Sale and Held-To-Maturity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
June
30, 2022 | |
| |
| | |
Gross | | |
Gross | | |
Estimated | |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
Fair | |
| |
Cost | | |
Gains | | |
Losses | | |
Value | |
Available
for sale | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | 27,451 | | |
$ | — | | |
$ | (1,453 | ) | |
$ | 25,998 | |
State and municipal obligations | |
| 25,930 | | |
| 13 | | |
| (3,468 | ) | |
| 22,475 | |
Collateralized mortgage obligations - agency | |
| 24,124 | | |
| — | | |
| (1,079 | ) | |
| 23,045 | |
Asset-backed securities | |
| 2,311 | | |
| — | | |
| (94 | ) | |
| 2,217 | |
Corporate bonds | |
| 15,450 | | |
| 12 | | |
| (1,100 | ) | |
| 14,362 | |
Total | |
$ | 125,511 | | |
$ | 159 | | |
$ | (9,533 | ) | |
$ | 116,137 | |
| |
| | | |
| | | |
| | | |
| | |
Held
to maturity | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | 5,990 | | |
$ | — | | |
$ | (43 | ) | |
$ | 5,947 | |
Total | |
$ | 5,990 | | |
$ | — | | |
$ | (43 | ) | |
$ | 5,947 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December
31, 2021 | |
| |
| | |
Gross | | |
Gross | | |
Estimated | |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
Fair | |
| |
Cost | | |
Gains | | |
Losses | | |
Value | |
U.S. government agencies | |
$ | 9,479 | | |
$ | — | | |
$ | (40 | ) | |
$ | 9,439 | |
State and municipal obligations | |
$ | 26,011 | | |
$ | 959 | | |
$ | (293 | ) | |
$ | 26,677 | |
Collateralized mortgage obligations - agency | |
| 26,968 | | |
| 535 | | |
| (68 | ) | |
| 27,435 | |
Asset-backed securities | |
| 2,599 | | |
| — | | |
| (9 | ) | |
| 2,590 | |
Corporate bonds | |
| 12,200 | | |
| 360 | | |
| (157 | ) | |
| 12,403 | |
Total | |
$ | 110,448 | | |
$ | 2,170 | | |
$ | (656 | ) | |
$ | 111,962 | |
There were no
HTM securities held as of December 31, 2021.
Information
pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities
have been in a continuous loss position, follows (in thousands):
Schedule
of Securities Available-For-Sale and Held-To-Maturity, Unrealized Loss
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
June
30, 2022 | |
| |
Less
Than 12 Months | | |
More
Than 12 Months | | |
Total | |
| |
| | | |
| Unrealized | | |
| | | |
| Unrealized | | |
| | | |
| Unrealized | |
| |
| Fair
Value | | |
| Losses | | |
| Fair
Value | | |
| Losses | | |
| Fair
Value | | |
| Losses | |
Available
for sale | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | 25,998 | | |
$ | 1,453 | | |
$ | — | | |
$ | — | | |
$ | 25,998 | | |
$ | 1,453 | |
State and municipal obligations | |
| 17,477 | | |
| 2,468 | | |
| 2,806 | | |
| 1,000 | | |
| 20,283 | | |
| 3,468 | |
Collateralized mortgage obligations - agency | |
| 19,812 | | |
| 1,049 | | |
| 3,232 | | |
| 30 | | |
| 23,044 | | |
| 1,079 | |
Asset-backed securities | |
| — | | |
| — | | |
| 2,217 | | |
| 94 | | |
| 2,217 | | |
| 94 | |
Corporate bonds | |
| 10,742 | | |
| 1,008 | | |
| 1,609 | | |
| 92 | | |
| 12,351 | | |
| 1,100 | |
Total | |
$ | 97,063 | | |
$ | 8,317 | | |
$ | 9,864 | | |
$ | 1,216 | | |
$ | 106,927 | | |
$ | 9,533 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Held
to maturity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | 5,947 | | |
$ | 43 | | |
$ | — | | |
$ | — | | |
$ | 5,947 | | |
$ | 43 | |
Total | |
$ | 5,947 | | |
$ | 43 | | |
$ | — | | |
$ | — | | |
$ | 5,947 | | |
$ | 43 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
December
31, 2021 | |
| |
Less
Than 12 Months | | |
More
Than 12 Months | | |
Total | |
| |
Fair
Value | | |
Unrealized
Losses | | |
Fair
Value | | |
Unrealized
Losses | | |
Fair
Value | | |
Unrealized
Losses | |
U.S. government agencies | |
$ | 9,439 | | |
$ | 40 | | |
$ | — | | |
$ | — | | |
$ | 9,439 | | |
$ | 40 | |
State and municipal obligations | |
| 8,083 | | |
| 293 | | |
| — | | |
| — | | |
| 8,083 | | |
| 293 | |
Collateralized mortgage obligations - agency | |
| 11,687 | | |
| 68 | | |
| — | | |
| — | | |
| 11,687 | | |
| 68 | |
Asset-backed securities | |
| — | | |
| — | | |
| 2,590 | | |
| 9 | | |
| 2,590 | | |
| 9 | |
Corporate bonds | |
| 4,793 | | |
| 157 | | |
| — | | |
| — | | |
| 4,793 | | |
| 157 | |
Total | |
$ | 52,348 | | |
$ | 647 | | |
$ | 2,590 | | |
$ | 9 | | |
$ | 54,938 | | |
$ | 656 | |
There were no HTM securities held
as of December 31, 2021.
Information
pertaining to the number of securities with gross unrealized losses is detailed in the table below as of the dates indicated:
Schedule
of Number of Securities Available-For-Sale and Held-To-Maturity, Unrealized Loss
| |
|
|
|
|
|
|
|
|
|
| |
| |
June
30, 2022 | |
| |
Less
Than 12 Months | | |
More
Than 12 Months | | |
Total | |
Available
for sale | |
| | | |
| | | |
| | |
U.S. government agencies | |
| 8 | | |
| — | | |
| 8 | |
State and municipal obligations | |
| 21 | | |
| 3 | | |
| 24 | |
Collateralized mortgage obligations - agency | |
| 12 | | |
| 2 | | |
| 14 | |
Asset-backed securities | |
| — | | |
| 2 | | |
| 2 | |
Corporate bonds | |
| 26 | | |
| 5 | | |
| 31 | |
Total | |
| 83 | | |
| 12 | | |
| 95 | |
| |
| | | |
| | | |
| | |
Held
to maturity | |
| | | |
| | | |
| | |
U.S. government agencies | |
| 2 | | |
| — | | |
| 2 | |
Total | |
| 2 | | |
| — | | |
| 2 | |
| |
| | | |
| | | |
| | |
| |
December
31, 2021 | |
| |
Less
Than 12 Months | | |
More
Than 12 Months | | |
Total | |
U.S. government agencies | |
| 3 | | |
| — | | |
| 3 | |
State and municipal obligations | |
| 8 | | |
| — | | |
| 8 | |
Collateralized mortgage obligations - agency | |
| 5 | | |
| — | | |
| 5 | |
Asset-backed securities | |
| — | | |
| 2 | | |
| 2 | |
Corporate bonds | |
| 10 | | |
| — | | |
| 10 | |
Total | |
| 33 | | |
| 2 | | |
| 35 | |
Management of
the Company believes all unrealized losses have resulted from temporary changes in the interest rate market and not as a result
of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities
referenced in the table below before recovery of their amortized cost.
There were no
AFS or HTM investment security sales for the three or six months ended June 30, 2022 or 2021.
The amortized
cost and estimated fair value of AFS investments in debt securities at June 30, 2022, by contractual maturity, are shown below
(in thousands).
Schedule
of Securities Available-For-Sale and Held-To-Maturity by Contractual Maturity
| |
Available
for sale | | |
Held
to maturity | |
| |
Amortized
Cost | | |
Fair
Value | | |
Amortized
Cost | | |
Fair
Value | |
Over
1 year through 5 years | |
$ | 17,971 | | |
$ | 17,413 | | |
$ | 5,990 | | |
$ | 5,947 | |
Over
5 years through 10 years | |
| 31,558 | | |
| 28,658 | | |
| — | | |
| — | |
Over
10 years | |
| 19,302 | | |
| 16,764 | | |
| — | | |
| — | |
Total
securities other than asset-backed and mortgage-backed
securities | |
| 68,831 | | |
| 62,835 | | |
| 5,990 | | |
| 5,947 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed
securities | |
| | |
| | |
| | |
| |
Collaterized
mortgage obligations | |
| 24,124 | | |
| 23,045 | | |
| — | | |
| — | |
Asset-backed
securities | |
| 2,311 | | |
| 2,217 | | |
| — | | |
| — | |
Total | |
$ | 125,511 | | |
$ | 116,137 | | |
$ | 5,990 | | |
$ | 5,947 | |
Expected maturities
may differ from contractual maturities when issuers and borrowers have the right to call or prepay the obligations.
There was $0.5 million of AFS securities pledged against deposits and borrowings at June 30, 2022 and December 31, 2021. There were no HTM securities
pledged against deposits and borrowings at June 30, 2022 and December 31, 2021.
Other investments are comprised of
the following and are recorded at cost which approximates fair value (in thousands):
Schedule of Other Investment
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
Federal
Home Loan Bank stock | |
$ | 790 | | |
$ | 733 | |
Investment
in Trust Preferred Securities | |
| 247 | | |
| 247 | |
Certificates
of deposit | |
| 1,004 | | |
| 1,504 | |
Other
investments | |
| 585 | | |
| 500 | |
Total
other investments, at cost | |
$ | 2,626 | | |
$ | 2,984 | |
Certificates
of deposit totaling $0.3 million and $1.3 million were pledged against customer deposits at June 30, 2022 and December 31, 2021,
respectively. Federal Home Loan Bank of Atlanta (“FHLB”) stock is used to collateralize advances with the FHLB.
NOTE
3. LOANS RECEIVABLE
Loans receivable are summarized in
the table below as of the dates indicated (in thousands):
Schedule of Loans Receivable
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
Real
estate loans: | |
| | | |
| | |
One-to
four-family residential | |
$ | 145,229 | | |
$ | 132,836 | |
Commercial
real estate | |
| 411,190 | | |
| 423,552 | |
Home
equity loans and lines of credit | |
| 21,389 | | |
| 21,568 | |
Residential
construction | |
| 36,443 | | |
| 38,881 | |
Other
construction and land | |
| 82,223 | | |
| 75,682 | |
Total
real estate loans | |
| 696,474 | | |
| 692,519 | |
Commercial
and industrial | |
| 250,584 | | |
| 234,355 | |
Consumer | |
| 6,275 | | |
| 7,129 | |
Total
commercial and consumer | |
| 256,859 | | |
| 241,484 | |
Loans
receivable, gross | |
| 953,333 | | |
| 934,003 | |
Net
deferred loan fees | |
| (520 | ) | |
| (528 | ) |
Loans
receivable, net of deferred fees | |
$ | 952,813 | | |
$ | 933,475 | |
Commercial loans
includes PPP loans with recorded investments of zero and $1.3 million as of June 30, 2022 and December 31, 2021, respectively.
The Bank
had $71.9 million and $46.6 million of loans pledged as collateral to secure funding with the FHLB at June 30, 2022 and December
31, 2021, respectively.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
The changes
in the allowance for loan losses by portfolio segment are presented in the following tables for the periods indicated (in thousands):
Schedule
of Changes in Allowance for Credit Losses by Portfolio Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Three
Months Ended June 30, 2022 | |
| |
One-to-four
Family
Residential | | |
Commercial
Real Estate | | |
Home
Equity
and Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and Land | | |
Commercial | | |
Consumer | | |
Total | |
Beginning
balance | |
$ | 1,343 | | |
$ | 4,570 | | |
$ | 227 | | |
$ | 404 | | |
$ | 857 | | |
$ | 6,375 | | |
$ | 173 | | |
$ | 13,949 | |
Provision | |
| (18 | ) | |
| 18 | | |
| 16 | | |
| (3 | ) | |
| 21 | | |
| 82 | | |
| 3 | | |
| 119 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (182 | ) | |
| (10 | ) | |
| (192 | ) |
Recoveries | |
| 106 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 118 | | |
| — | | |
| 224 | |
Ending
balance | |
$ | 1,431 | | |
$ | 4,588 | | |
$ | 243 | | |
$ | 401 | | |
$ | 878 | | |
$ | 6,393 | | |
$ | 166 | | |
$ | 14,100 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Three
Months Ended June 30, 2021 | |
| |
One-to-four
Family
Residential | | |
Commercial
Real Estate | | |
Home
Equity
and Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and Land | | |
Commercial | | |
Consumer | | |
Total | |
Beginning
balance | |
$ | 1,270 | | |
$ | 4,411 | | |
$ | 207 | | |
$ | 320 | | |
$ | 918 | | |
$ | 5,615 | | |
$ | 218 | | |
$ | 12,959 | |
Provision | |
| (47 | ) | |
| 303 | | |
| 19 | | |
| 52 | | |
| (158 | ) | |
| 99 | | |
| 41 | | |
| 309 | |
Charge-offs | |
| 1 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (98 | ) | |
| — | | |
| (97 | ) |
Recoveries | |
| 3 | | |
| — | | |
| — | | |
| — | | |
| 17 | | |
| 134 | | |
| — | | |
| 154 | |
Ending
balance | |
$ | 1,227 | | |
$ | 4,714 | | |
$ | 226 | | |
$ | 372 | | |
$ | 777 | | |
$ | 5,750 | | |
$ | 259 | | |
$ | 13,325 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Six
Months Ended June 30, 2022 | |
| |
One-to-four
Family
Residential | | |
Commercial
Real Estate | | |
Home
Equity
and Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and Land | | |
Commercial | | |
Consumer | | |
Total | |
Beginning
balance | |
$ | 1,363 | | |
$ | 4,688 | | |
$ | 246 | | |
$ | 430 | | |
$ | 824 | | |
$ | 5,985 | | |
$ | 187 | | |
$ | 13,723 | |
Provision | |
| (40 | ) | |
| (152 | ) | |
| (3 | ) | |
| (29 | ) | |
| 35 | | |
| 627 | | |
| (11 | ) | |
| 427 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (529 | ) | |
| (10 | ) | |
| (539 | ) |
Recoveries | |
| 108 | | |
| 52 | | |
| — | | |
| — | | |
| 19 | | |
| 310 | | |
| — | | |
| 489 | |
Ending
balance | |
$ | 1,431 | | |
$ | 4,588 | | |
$ | 243 | | |
$ | 401 | | |
$ | 878 | | |
$ | 6,393 | | |
$ | 166 | | |
$ | 14,100 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Six
Months Ended June 30, 2021 | |
| |
One-to-four
Family
Residential | | |
Commercial
Real
Estate | | |
Home
Equity
and
Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and
Land | | |
Commercial | | |
Consumer | | |
Total | |
Beginning
balance | |
$ | 1,297 | | |
$ | 4,559 | | |
$ | 231 | | |
$ | 389 | | |
$ | 843 | | |
$ | 5,118 | | |
$ | 135 | | |
$ | 12,572 | |
Provision | |
| (60 | ) | |
| 155 | | |
| (5 | ) | |
| (17 | ) | |
| (83 | ) | |
| 437 | | |
| 124 | | |
| 551 | |
Charge-offs | |
| (29 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (204 | ) | |
| — | | |
| (233 | ) |
Recoveries | |
| 19 | | |
| — | | |
| — | | |
| — | | |
| 17 | | |
| 399 | | |
| — | | |
| 435 | |
Ending
balance | |
$ | 1,227 | | |
$ | 4,714 | | |
$ | 226 | | |
$ | 372 | | |
$ | 777 | | |
$ | 5,750 | | |
$ | 259 | | |
$ | 13,325 | |
The allocation of the allowance for loan losses and the recorded
investment in loans is presented in the following tables by portfolio segment and reserving methodology as of the dates indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June
30, 2022 | |
| |
One-to-four
Family
Residential | | |
Commercial
Real Estate | | |
Home
Equity
and Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and Land | | |
Commercial | | |
Consumer | | |
Total | |
Allowance
for loan losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 17 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 17 | |
Collectively
evaluated for impairment | |
| 1,414 | | |
| 4,588 | | |
| 243 | | |
| 401 | | |
| 878 | | |
| 6,393 | | |
| 166 | | |
| 14,083 | |
Ending Balance | |
$ | 1,431 | | |
$ | 4,588 | | |
$ | 243 | | |
$ | 401 | | |
$ | 878 | | |
$ | 6,393 | | |
$ | 166 | | |
$ | 14,100 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans
receivable | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 618 | | |
$ | 1,825 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2,443 | |
Collectively
evaluated for impairment | |
| 144,347 | | |
| 408,666 | | |
| 21,419 | | |
| 36,300 | | |
| 81,973 | | |
| 251,289 | | |
| 6,376 | | |
| 950,370 | |
Loans and Leases Receivable, Gross | |
$ | 144,965 | | |
$ | 410,491 | | |
$ | 21,419 | | |
$ | 36,300 | | |
$ | 81,973 | | |
$ | 251,289 | | |
$ | 6,376 | | |
$ | 952,813 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December
31, 2021 | |
| |
One-to-four
Family
Residential | | |
Commercial
Real Estate | | |
Home
Equity
and Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and Land | | |
Commercial | | |
Consumer | | |
Total | |
Allowance
for loan losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 20 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 20 | |
Collectively
evaluated for impairment | |
| 1,343 | | |
| 4,688 | | |
| 246 | | |
| 430 | | |
| 824 | | |
| 5,985 | | |
| 187 | | |
| 13,703 | |
Ending Balance | |
$ | 1,363 | | |
$ | 4,688 | | |
$ | 246 | | |
$ | 430 | | |
$ | 824 | | |
$ | 5,985 | | |
$ | 187 | | |
$ | 13,723 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans
receivable | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 735 | | |
$ | 2,080 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 28 | | |
$ | — | | |
$ | 2,843 | |
Collectively
evaluated for impairment | |
| 131,870 | | |
| 420,797 | | |
| 21,601 | | |
| 38,750 | | |
| 75,349 | | |
| 235,028 | | |
| 7,237 | | |
| 930,632 | |
Loans and Leases Receivable, Gross | |
$ | 132,605 | | |
$ | 422,877 | | |
$ | 21,601 | | |
$ | 38,750 | | |
$ | 75,349 | | |
$ | 235,056 | | |
$ | 7,237 | | |
$ | 933,475 | |
Portfolio Quality Indicators
The
Company’s loan portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations
of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly
graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management
analyzes the resulting information, as well as other external statistics and factors, to track loan performance.
The
Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:
| · | Pass
(1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated. |
| · | Special
Mention (6) – Potential weakness or identifiable weakness present without appropriate
mitigating factors; however, loan continues to perform satisfactorily with no material
delinquency noted. This may include some deterioration in repayment capacity and/or
loan-to-value of securing collateral. |
| · | Substandard
(7) – Significant weakness that remains unmitigated, most likely due to diminished
repayment capacity, serious delinquency, and/or marginal performance based upon restructured
loan terms. |
| · | Doubtful
(8) – Significant weakness that remains unmitigated and collection in full is highly
questionable or improbable. |
| · | Loss
(9) – Collectability is unlikely resulting in immediate charge-off. |
Description of Segment and Class
Risks
Each of our
portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit
quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar
among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined
are the most significant.
One-to-four
family residential
We centrally
underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved
lending policy and internal procedures based upon industry best practices and regulatory directives. We also evaluate the value
and marketability of the collateral. Common risks to each class of non-commercial loans, including one-to-four family residential,
include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly
unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status
also add risk to non-commercial loans.
Commercial real estate
Commercial mortgage
loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan
origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are
significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with
the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as
inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.
Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with
multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to
service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental
rate concessions to achieve adequate occupancy rates.
Home equity
and lines of credit
Home equity
loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible
to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively
unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our
collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines of credit
in excess of the collateral value if there have been significant declines since origination.
Residential
construction and other construction and land
Residential
mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home
construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate
values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market
value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed
the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed
collateral with unrealized value and diminished marketability. Commercial construction and land
development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand
for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the
underlying collateral values and make repayment of the outstanding loans more difficult for our customers.
Commercial
We centrally
underwrite each of our commercial loans, which includes agricultural loans and specialty floor-plan lending, based primarily upon
the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and
conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses, including the
experience and background of the principals of such businesses. To the extent that the loan is secured by collateral, which is
a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we
gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the
extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial
strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to
individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction
including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability
or change in marital status, and reductions in the value of our collateral. Common risks to specialty floor-plan lending includes
adverse conditions in the automobile market and risks associated with declining values. The performance of agricultural loans
is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the
product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the
control of the borrower.
Consumer
The consumer
loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational
vehicles including boats and motorcycles, purchased student loans for which there is a 98% guarantee, as well as unsecured consumer
debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values
since the date of loan origination in excess of principal repayment. Following the sale of $24.6 million of the purchased student
loans during the fourth quarter of 2021, as of December 31, 2021, the balance of purchased student loans was $0.7 million, which
decreased to zero as of June 30, 2022.
The recorded investment in
loans by portfolio segment and loan grade is presented in the following tables as of the dates indicated (in thousands):
Schedule of Loans by Portfolio and Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June
30, 2022 | |
Loan
Grade | |
One-to-Four
Family
Residential | | |
Commercial
Real Estate | | |
Home
Equity
and Lines of
Credit | | |
Residential
Construction | | |
Other
Construction
and Land | | |
Commercial | | |
Consumer | | |
Total | |
1 | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 308 | | |
$ | 157 | | |
$ | 465 | |
2 | |
| — | | |
| 232 | | |
| — | | |
| — | | |
| — | | |
| 249 | | |
| — | | |
| 481 | |
3 | |
| 6,345 | | |
| 36,032 | | |
| 3,409 | | |
| — | | |
| 3,306 | | |
| 12,102 | | |
| 50 | | |
| 61,244 | |
4 | |
| 117,287 | | |
| 304,414 | | |
| 15,776 | | |
| 30,096 | | |
| 64,310 | | |
| 103,174 | | |
| 5,062 | | |
| 640,119 | |
5 | |
| 18,971 | | |
| 65,004 | | |
| 1,942 | | |
| 6,204 | | |
| 14,357 | | |
| 132,274 | | |
| 1,064 | | |
| 239,816 | |
6 | |
| 1,677 | | |
| 2,881 | | |
| 292 | | |
| — | | |
| — | | |
| 2,854 | | |
| 16 | | |
| 7,720 | |
7 | |
| 685 | | |
| 1,928 | | |
| — | | |
| — | | |
| — | | |
| 328 | | |
| 27 | | |
| 2,968 | |
Total | |
$ | 144,965 | | |
$ | 410,491 | | |
$ | 21,419 | | |
$ | 36,300 | | |
$ | 81,973 | | |
$ | 251,289 | | |
$ | 6,376 | | |
$ | 952,813 | |
| |
| |
| |
December
31, 2021 | |
Loan
Grade | |
One-to-Four
Family Residential | | |
Commercial
Real Estate | | |
Home
Equity and Lines of Credit | | |
Residential
Construction | | |
Other
Construction and Land | | |
Commercial | | |
Consumer | | |
Total | |
1 | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 306 | | |
$ | 191 | | |
$ | 497 | |
2 | |
| — | | |
| 245 | | |
| — | | |
| — | | |
| — | | |
| 247 | | |
| — | | |
| 492 | |
3 | |
| 8,719 | | |
| 39,770 | | |
| 3,477 | | |
| — | | |
| 3,959 | | |
| 11,071 | | |
| 53 | | |
| 67,049 | |
4 | |
| 103,893 | | |
| 313,071 | | |
| 16,013 | | |
| 35,707 | | |
| 57,750 | | |
| 102,246 | | |
| 5,461 | | |
| 634,141 | |
5 | |
| 17,482 | | |
| 60,576 | | |
| 1,715 | | |
| 3,043 | | |
| 13,640 | | |
| 119,455 | | |
| 1,434 | | |
| 217,345 | |
6 | |
| 1,433 | | |
| 6,729 | | |
| 318 | | |
| — | | |
| — | | |
| 1,123 | | |
| 44 | | |
| 9,647 | |
7 | |
| 1,078 | | |
| 2,486 | | |
| 78 | | |
| — | | |
| — | | |
| 608 | | |
| 54 | | |
| 4,304 | |
Total | |
$ | 132,605 | | |
$ | 422,877 | | |
$ | 21,601 | | |
$ | 38,750 | | |
$ | 75,349 | | |
$ | 235,056 | | |
$ | 7,237 | | |
$ | 933,475 | |
Delinquency
Analysis of Loans by Class
An aging analysis
of the recorded investment of loans by portfolio segment, including loans on nonaccrual status as well as accruing TDRs and purchased
student loans for which there is a 98% guarantee, is presented in the following tables as of the dates indicated (in thousands).
Schedule of Aging Analysis of Recorded
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
June
30, 2022 | |
| |
30-59
Days Past
Due | | |
60-89
Days Past
Due | | |
90
Days and Over
Past Due | | |
Total
Past
Due | | |
Current | | |
Total
Loans
Receivable | |
One-to-four
family residential | |
$ | — | | |
$ | 39 | | |
$ | — | | |
$ | 39 | | |
$ | 144,926 | | |
$ | 144,965 | |
Commercial
real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 410,491 | | |
| 410,491 | |
Home
equity and lines of credit | |
| — | | |
| — | | |
| — | | |
| — | | |
| 21,419 | | |
| 21,419 | |
Residential
construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 36,300 | | |
| 36,300 | |
Other
construction and land | |
| — | | |
| — | | |
| — | | |
| — | | |
| 81,973 | | |
| 81,973 | |
Commercial | |
| — | | |
| — | | |
| 54 | | |
| 54 | | |
| 251,235 | | |
| 251,289 | |
Consumer | |
| — | | |
| — | | |
| — | | |
| — | | |
| 6,376 | | |
| 6,376 | |
Total | |
$ | — | | |
$ | 39 | | |
$ | 54 | | |
$ | 93 | | |
$ | 952,720 | | |
$ | 952,813 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
December
31, 2021 | |
| |
30-59
Days Past
Due | | |
60-89
Days Past
Due | | |
90
Days and Over
Past Due | | |
Total
Past
Due | | |
Current | | |
Total
Loans
Receivable | |
One-to-four
family residential | |
$ | — | | |
$ | — | | |
$ | 50 | | |
$ | 50 | | |
$ | 132,555 | | |
$ | 132,605 | |
Commercial
real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 422,877 | | |
| 422,877 | |
Home
equity and lines of credit | |
| — | | |
| — | | |
| — | | |
| — | | |
| 21,601 | | |
| 21,601 | |
Residential
construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 38,750 | | |
| 38,750 | |
Other
construction and land | |
| — | | |
| — | | |
| — | | |
| — | | |
| 75,349 | | |
| 75,349 | |
Commercial | |
| 54 | | |
| — | | |
| — | | |
| 54 | | |
| 235,002 | | |
| 235,056 | |
Consumer | |
| — | | |
| — | | |
| 590 | | |
| 590 | | |
| 6,647 | | |
| 7,237 | |
Total | |
$ | 54 | | |
$ | — | | |
$ | 640 | | |
$ | 694 | | |
$ | 932,781 | | |
$ | 933,475 | |
The decrease
in past due consumer loans is primarily attributable to the sale of the purchased student loan portfolio, the balance of which,
as of December 31, 2021, was $0.7 million, and decreased to zero as of June 30, 2022.
Impaired
Loans
The following
table presents recorded investments in loans considered to be impaired and related information on those impaired loans as of June
30, 2022 and December 31, 2021 (in thousands).
Schedule of Impaired Loans
| |
June
30, 2022 | | |
December
31, 2021 | |
| |
Recorded
Balance | | |
Unpaid
Principal
Balance | | |
Specific
Allowance | | |
Recorded
Balance | | |
Unpaid
Principal
Balance | | |
Specific
Allowance | |
Loans
without a valuation allowance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
One-to-four
family residential | |
$ | 276 | | |
$ | 276 | | |
$ | — | | |
$ | 387 | | |
$ | 387 | | |
$ | — | |
Commercial
real estate | |
| 1,825 | | |
| 1,825 | | |
| — | | |
| 2,080 | | |
| 2,132 | | |
| — | |
Commercial | |
| — | | |
| — | | |
| — | | |
| 28 | | |
| 28 | | |
| — | |
| |
| 2,101 | | |
| 2,101 | | |
| — | | |
| 2,495 | | |
| 2,547 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans
with a valuation allowance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
One-to-four
family residential | |
| 342 | | |
| 342 | | |
| 17 | | |
| 348 | | |
| 348 | | |
| 20 | |
| |
| 342 | | |
| 342 | | |
| 17 | | |
| 348 | | |
| 348 | | |
| 20 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
One-to-four
family residential | |
| 618 | | |
| 618 | | |
| 17 | | |
| 735 | | |
| 735 | | |
| 20 | |
Commercial
real estate | |
| 1,825 | | |
| 1,825 | | |
| — | | |
| 2,080 | | |
| 2,132 | | |
| — | |
Commercial | |
| — | | |
| — | | |
| — | | |
| 28 | | |
| 28 | | |
| — | |
| |
$ | 2,443 | | |
$ | 2,443 | | |
$ | 17 | | |
$ | 2,843 | | |
$ | 2,895 | | |
$ | 20 | |
The average
recorded investment in impaired loans by portfolio segment and interest income recognized on those impaired loans is presented
in the following table for the periods indicated (in thousands):
| |
Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Average
Investment in
Impaired
Loans | | |
Interest
Income
Recognized | | |
Average
Investment in
Impaired
Loans | | |
Interest
Income
Recognized | |
Loans without a valuation allowance | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
$ | 277 | | |
$ | 3 | | |
$ | 282 | | |
$ | 3 | |
Commercial real estate | |
| 1,857 | | |
| 24 | | |
| 1,542 | | |
| 18 | |
| |
| 2,134 | | |
| 27 | | |
| 1,824 | | |
| 21 | |
| |
| | | |
| | | |
| | | |
| | |
Loans with a valuation allowance | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
| 343 | | |
| 3 | | |
| 356 | | |
| 3 | |
| |
| 343 | | |
| 3 | | |
| 356 | | |
| 3 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
| 620 | | |
| 6 | | |
| 638 | | |
| 6 | |
Commercial real estate | |
| 1,857 | | |
| 24 | | |
| 1,542 | | |
| 18 | |
| |
$ | 2,477 | | |
$ | 30 | | |
$ | 2,180 | | |
$ | 24 | |
| |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Average
Investment in
Impaired
Loans | | |
Interest
Income
Recognized | | |
Average
Investment in
Impaired
Loans | | |
Interest
Income
Recognized | |
Loans without a valuation allowance | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
$ | 278 | | |
$ | 6 | | |
$ | 283 | | |
$ | 6 | |
Commercial real estate | |
| 1,885 | | |
| 47 | | |
| 1,562 | | |
| 40 | |
| |
| 2,163 | | |
| 53 | | |
| 1,845 | | |
| 46 | |
| |
| | | |
| | | |
| | | |
| | |
Loans with a valuation allowance | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
| 344 | | |
| 6 | | |
| 357 | | |
| 6 | |
| |
| 344 | | |
| 6 | | |
| 357 | | |
| 6 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
| 622 | | |
| 12 | | |
| 640 | | |
| 12 | |
Commercial real estate | |
| 1,885 | | |
| 47 | | |
| 1,562 | | |
| 40 | |
| |
$ | 2,507 | | |
$ | 59 | | |
$ | 2,202 | | |
$ | 52 | |
Nonperforming
Loans
The recorded
investment of nonperforming loans by portfolio segment is presented in the table below as of the dates indicated (in thousands):
Schedule of Non-Performaing Loans
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
One-to-four
family residential | |
$ | 24 | | |
$ | 107 | |
Commercial
real estate | |
| — | | |
| 767 | |
Commercial | |
| 289 | | |
| 473 | |
Consumer | |
| — | | |
| 2 | |
Nonperforming
loans | |
$ | 313 | | |
$ | 1,349 | |
TDRs
The recorded investment in
performing and nonperforming TDRs by portfolio segment is presented in the tables below as of the dates indicated (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
| |
June
30, 2022 | |
| |
Performing | | |
Nonperforming | | |
Total | |
| |
TDRs | | |
TDRs | | |
TDRs | |
One-to-four
family residential | |
$ | 563 | | |
$ | — | | |
$ | 563 | |
Commercial
real estate | |
| 911 | | |
| — | | |
| 911 | |
Commercial | |
| 198 | | |
| 101 | | |
| 299 | |
Consumer | |
| 10 | | |
| — | | |
| 10 | |
Total | |
$ | 1,682 | | |
$ | 101 | | |
$ | 1,783 | |
| |
| | | |
| | | |
| | |
| |
December
31, 2021 | |
| |
Performing | | |
Nonperforming | | |
Total | |
| |
TDRs | | |
TDRs | | |
TDRs | |
One-to-four
family residential | |
$ | 577 | | |
$ | — | | |
$ | 577 | |
Commercial
real estate | |
| 961 | | |
| — | | |
| 961 | |
Commercial | |
| 205 | | |
| 110 | | |
| 315 | |
Consumer | |
| 37 | | |
| 2 | | |
| 39 | |
Total | |
$ | 1,780 | | |
$ | 112 | | |
$ | 1,892 | |
Loan modifications that were
deemed TDRs at the time of the modification are presented in the table below for the periods indicated (in thousands):
There were no new TDR modifications
during the three months ended June 30, 2022 and 2021. There were no new TDR modifications during the six months ended June 30,
2022.
| |
Modification Type | | |
Number of TDR
Loans | | |
Pre-Modification
Recorded
Investment | | |
Post-Modification
Recorded
Investment | |
Six
months ended June 30, 2021 | |
| | |
| | |
| | |
| |
| |
Interest
rate concession | | |
1 | | |
$ | 357 | | |
$ | 357 | |
During
the three and six month period ending June 30, 2022 or 2021, no loans previously modified as TDRs within the previous 12 months
defaulted.
NOTE
5. DEPOSITS
Deposit
balances and interest expense by type of deposit are summarized as follows as of and for the periods indicated (in thousands):
Schedule of Deposits
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
| |
| |
As
of and for the Six Months Ended June 30, | | |
As
of and for the Year Ended December 31 | |
| |
2022 | | |
2021 | | |
2021 | |
| |
Balance | | |
Interest
Expense | | |
Balance | | |
Interest
Expense | | |
Balance | | |
Interest
Expense | |
Noninterest-bearing
demand | |
$ | 301,487 | | |
$ | — | | |
$ | 252,050 | | |
$ | — | | |
$ | 280,665 | | |
$ | — | |
Interest-bearing
demand | |
| 65,557 | | |
| 51 | | |
| 72,236 | | |
| 84 | | |
| 52,479 | | |
| 167 | |
Money
Market | |
| 543,606 | | |
| 1,086 | | |
| 440,716 | | |
| 915 | | |
| 500,862 | | |
| 1,888 | |
Savings | |
| 16,720 | | |
| 8 | | |
| 13,038 | | |
| 6 | | |
| 16,106 | | |
| 13 | |
Time
Deposits | |
| 183,731 | | |
| 300 | | |
| 238,342 | | |
| 791 | | |
| 208,929 | | |
| 1,192 | |
Total deposits | |
$ | 1,111,101 | | |
$ | 1,445 | | |
$ | 1,016,382 | | |
$ | 1,796 | | |
$ | 1,059,041 | | |
$ | 3,260 | |
NOTE
6. COMMITMENTS AND CONTINGENCIES
In the normal
course of business, we make various commitments and incur certain contingent liabilities, which are not reflected in the accompanying
financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby
letters of credit. At June 30, 2022, commitments to extend credit and standby letters of credit totaled $330.1 million. We do
not anticipate any material losses as a result of these transactions.
During 2021,
the Company entered into an agreement to fund capital contributions of up to $1 million with a financial technology company. As
of June 30, 2022, $85 thousand of the commitment has been funded. The Company has accounted for its ownership in the financial
technology company as an equity security in accordance with FASB ASC Subtopic 946-323. The funded balance is included in other
investments, at cost on the accompanying consolidated balance sheets. The Company has unfunded commitments of $0.9 million related
to this agreement as of June 30, 2022.
In the normal
course of business, the Company is periodically involved in litigation and other matters. In the opinion of the Company’s
management, none of the litigation and other matters are expected to have a material adverse effect on the accompanying consolidated
financial statements.
NOTE
7. EARNINGS PER SHARE
The following
is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock as of the dates
indicated (in thousands, except per share data):
Schedule of Earning per Share
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, | | |
June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator: | |
| | | |
| | | |
| | | |
| | |
Net
income | |
$ | 3,693 | | |
$ | 3,963 | | |
$ | 7,801 | | |
$ | 7,557 | |
Preferred
stock dividends | |
| (39 | ) | |
| (30 | ) | |
| (77 | ) | |
| (60 | ) |
Net
income applicable to common equity | |
| 3,654 | | |
| 3,933 | | |
| 7,724 | | |
| 7,497 | |
| |
| | | |
| | | |
| | | |
| | |
Undistributed
earnings allocated to participating securities | |
| (161 | ) | |
| (190 | ) | |
| (345 | ) | |
| (357 | ) |
Net
income applicable to common shareholders | |
$ | 3,493 | | |
$ | 3,743 | | |
$ | 7,379 | | |
$ | 7,140 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Basic
- Total weighted-average basic shares outstandings | |
| 5,201,806 | | |
| 5,134,112 | | |
| 5,192,202 | | |
| 5,167,763 | |
Stock
options | |
| 191,831 | | |
| 125,476 | | |
| 196,981 | | |
| 87,145 | |
Diluted
- Total weighted-average diluted shares outstanding | |
| 5,393,637 | | |
| 5,259,588 | | |
| 5,389,183 | | |
| 5,254,908 | |
| |
| | | |
| | | |
| | | |
| | |
Basic
income per share | |
$ | 0.67 | | |
$ | 0.73 | | |
$ | 1.42 | | |
$ | 1.38 | |
Diluted
income per share | |
$ | 0.65 | | |
$ | 0.71 | | |
$ | 1.37 | | |
$ | 1.36 | |
The Company
excluded 134,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise
price of $26.31 from the computation of diluted earnings per share for the three and six months ended June 30, 2022 because of
their antidilutive effect.
The Company
excluded 102,500 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise
price of $24.20 from the computation of diluted earnings per share for the three and six months ended June 30, 2021 because of
their antidilutive effect.
NOTE 8. ACCUMULATED OTHER COMPREHENSIVE
INCOME
The components
of accumulated other comprehensive income and changes in those components are presented in the tables below as of and for the
years indicated (in thousands).
Schedule of Changes
in Accumulated Other Comprehensive Income
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, 2022 | | |
June
30, 2022 | |
| |
AFS
Securities | | |
Total | | |
AFS
Securities | | |
Total | |
Balance,
beginning of period | |
$ | (3,734 | ) | |
$ | (3,734 | ) | |
$ | 1,186 | | |
$ | 1,186 | |
Change
in net unrealized holding gains on AFS securities | |
| (4,596 | ) | |
| (4,596 | ) | |
| (10,888 | ) | |
| (10,888 | ) |
Income
tax effect | |
| 1,001 | | |
| 1,001 | | |
| 2,373 | | |
| 2,373 | |
Balance,
end of period | |
$ | (7,329 | ) | |
$ | (7,329 | ) | |
$ | (7,329 | ) | |
$ | (7,329 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, 2021 | | |
June
30, 2021 | |
| |
AFS
Securities | | |
Total | | |
AFS
Securities | | |
Total | |
Balance,
beginning of period | |
$ | 597 | | |
$ | 597 | | |
$ | 2,159 | | |
$ | 2,159 | |
Change
in net unrealized holding losses on AFS securities | |
| 1,095 | | |
| 1,095 | | |
| (901 | ) | |
| (901 | ) |
Income
tax effect | |
| (238 | ) | |
| (238 | ) | |
| 196 | | |
| 196 | |
Balance,
end of period | |
$ | 1,454 | | |
$ | 1,454 | | |
$ | 1,454 | | |
$ | 1,454 | |
There
were no line items in the Consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive
income in the three or six months ended June 30, 2022 and 2021.
NOTE
9. REPORTABLE SEGMENTS
GrandSouth Bank
conducts traditional banking operations (as GrandSouth Bank, or Core Bank) and offers specialty lending (as CarBucks). The Core
Bank and CarBucks are GrandSouth’s primary reportable segments for management financial reporting. This business segment
structure along primary lending products is consistent with the way management internally reviews financial information and allocates
resources. Results for prior periods have been restated for comparability.
Segment information
is shown in the tables below as of and for the periods indicated (in thousands).
Schedule of Reportable Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
As
of and for the Three Months Ended June 30, 2022 | |
| |
Core
Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest
income | |
$ | 8,789 | | |
$ | 5,205 | | |
$ | 604 | | |
$ | 14,598 | |
Interest
expense | |
| 7 | | |
| 756 | | |
| 450 | | |
| 1,213 | |
Net
interest income | |
| 8,782 | | |
| 4,449 | | |
| 154 | | |
| 13,385 | |
Provision
for loan losses | |
| 157 | | |
| (38 | ) | |
| — | | |
| 119 | |
Noninterest
income | |
| 502 | | |
| 57 | | |
| 78 | | |
| 637 | |
Noninterest
expense | |
| 5,325 | | |
| 2,786 | | |
| 916 | | |
| 9,027 | |
Income
tax expense | |
| 878 | | |
| 425 | | |
| (120 | ) | |
| 1,183 | |
Net
income | |
$ | 2,924 | | |
$ | 1,333 | | |
$ | (564 | ) | |
$ | 3,693 | |
| |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 1,010,324 | | |
$ | 106,307 | | |
$ | 137,401 | | |
$ | 1,254,032 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
As
of and for the Three Months Ended June 30, 2021 | |
| |
Core
Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest
income | |
$ | 8,449 | | |
$ | 4,512 | | |
$ | 430 | | |
$ | 13,391 | |
Interest
expense | |
| 499 | | |
| 340 | | |
| 432 | | |
| 1,271 | |
Net
interest income | |
| 7,950 | | |
| 4,172 | | |
| (2 | ) | |
| 12,120 | |
Provision
for loan losses | |
| 68 | | |
| 241 | | |
| — | | |
| 309 | |
Noninterest
income | |
| 577 | | |
| 38 | | |
| 153 | | |
| 768 | |
Noninterest
expense | |
| 4,941 | | |
| 2,440 | | |
| 22 | | |
| 7,403 | |
Income
tax expense | |
| 826 | | |
| 356 | | |
| 31 | | |
| 1,213 | |
Net
income | |
$ | 2,692 | | |
$ | 1,173 | | |
$ | 98 | | |
$ | 3,963 | |
| |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 930,199 | | |
$ | 86,833 | | |
$ | 146,439 | | |
$ | 1,163,471 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
As
of and for the Six Months Ended June 30, 2022 | |
| |
Core
Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest
income | |
$ | 17,118 | | |
$ | 10,511 | | |
$ | 1,140 | | |
$ | 28,769 | |
Interest
expense | |
| 210 | | |
| 1,245 | | |
| 883 | | |
| 2,338 | |
Net
interest income | |
| 16,908 | | |
| 9,266 | | |
| 257 | | |
| 26,431 | |
Provision
for loan losses | |
| (167 | ) | |
| 594 | | |
| — | | |
| 427 | |
Noninterest
income | |
| 985 | | |
| 121 | | |
| 157 | | |
| 1,263 | |
Noninterest
expense | |
| 10,615 | | |
| 5,465 | | |
| 932 | | |
| 17,012 | |
Income
tax expense | |
| 1,782 | | |
| 796 | | |
| (124 | ) | |
| 2,454 | |
Net
income | |
$ | 5,663 | | |
$ | 2,532 | | |
$ | (394 | ) | |
$ | 7,801 | |
| |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 1,010,324 | | |
$ | 106,307 | | |
$ | 137,401 | | |
$ | 1,254,032 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
As
of and for the Six Months Ended June 30, 2021 | |
| |
Core
Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest
income | |
$ | 17,026 | | |
$ | 9,125 | | |
$ | 769 | | |
$ | 26,920 | |
Interest
expense | |
| 1,162 | | |
| 705 | | |
| 865 | | |
| 2,732 | |
Net
interest income | |
| 15,864 | | |
| 8,420 | | |
| (96 | ) | |
| 24,188 | |
Provision
for loan losses | |
| 591 | | |
| (40 | ) | |
| — | | |
| 551 | |
Noninterest
income | |
| 1,024 | | |
| 75 | | |
| 244 | | |
| 1,343 | |
Noninterest
expense | |
| 10,158 | | |
| 4,875 | | |
| 37 | | |
| 15,070 | |
Income
tax expense | |
| 1,457 | | |
| 869 | | |
| 27 | | |
| 2,353 | |
Net
income | |
$ | 4,682 | | |
$ | 2,791 | | |
$ | 84 | | |
$ | 7,557 | |
| |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 930,199 | | |
$ | 86,833 | | |
$ | 146,439 | | |
$ | 1,163,471 | |
Core
Bank – The bank’s primary business is to provide traditional deposit and lending products and services to commercial
and retail banking clients.
CarBucks –
The banking division that provides specialty floor plan lending to small automobile dealers in over 20 states.
Other
– Includes AFS securities portfolio, BOLI, parent company activities, net intercompany eliminations, and certain other activities
not currently allocated to the aforementioned segments.
NOTE 10. FAIR VALUE DISCLOSURES
Overview
Fair value measurements
are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering
market participant assumptions in fair value measurements, ASC Topic 820, Fair Value Measurements and Disclosures (“ASC
820”) establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of
the hierarchy) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).
Fair Value
Hierarchy
Level 1
- Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that
the Company has the ability to access at the measurement date.
Level 2
- Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other
market-corroborated inputs.
Level 3
- Valuation is generated from techniques that use at least one significant assumption not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
In general,
fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is
based upon models that primarily use, as inputs, observable market-based parameters. 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 Company evaluates fair value measurement
inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between
levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that
caused the transfer, which generally coincides with the Company’s valuation process.
Financial Assets and Financial
Liabilities Measured on a Recurring Basis
The Company
uses the following methods and assumptions in estimating the fair value of its financial assets and financial liabilities on a
recurring basis:
Investment Securities Available-for-Sale
We obtain fair
values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities.
The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are
classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid
and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and
conditions databases, as well as extensive quality control programs.
Also included
in securities are corporate bonds which are valued using significant unobservable inputs and are classified as Level 2 or Level
3 based on market information available during the period.
Financial assets measured
at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure
fair value are presented below as of the dates indicated (in thousands):
Schedule of Financial Assets Measured at Fair Value on Recurring Basis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
June
30, 2022 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Assets: | |
| | | |
| | | |
| | | |
| | |
U.S.
government agencies | |
$ | — | | |
$ | 25,998 | | |
$ | — | | |
$ | 25,998 | |
State
and municipal obligations | |
| — | | |
| 22,475 | | |
| — | | |
| 22,475 | |
Collateralized
mortgage obligations - agency | |
| — | | |
| 23,045 | | |
| — | | |
| 23,045 | |
Asset-backed
securities | |
| — | | |
| 2,217 | | |
| — | | |
| 2,217 | |
Corporate
bonds | |
| — | | |
| — | | |
| 14,362 | | |
| 14,362 | |
Total
recurring assets at fair value | |
$ | — | | |
$ | 101,775 | | |
$ | 14,362 | | |
$ | 116,137 | |
| |
| | | |
| | | |
| | | |
| | |
| |
December
31, 2021 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Assets: | |
| | | |
| | | |
| | | |
| | |
U.S.
government agencies | |
$ | — | | |
$ | 9,439 | | |
$ | — | | |
$ | 9,439 | |
State
and municipal obligations | |
| — | | |
| 26,677 | | |
| — | | |
| 26,677 | |
Collateralized
mortgage obligations - agency | |
| — | | |
| 27,435 | | |
| — | | |
| 27,435 | |
Asset-backed
securities | |
| — | | |
| 2,590 | | |
| — | | |
| 2,590 | |
Corporate
bonds | |
| — | | |
| — | | |
| 12,403 | | |
| 12,403 | |
Total
recurring assets at fair value | |
$ | — | | |
$ | 99,559 | | |
$ | 12,403 | | |
$ | 111,962 | |
There were no
financial liabilities measured at fair value on a recurring basis as of June 30, 2022 or December 31, 2021.
The changes
in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are presented
in the following table for the years indicated (in thousands):
Schedule of Changes in Assets Measured at Fair Value on Recurring Basis
| |
|
|
|
|
|
| | |
|
|
|
|
|
| |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, | | |
June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Balance
at beginning of period | |
$ | 14,829 | | |
$ | 5,093 | | |
$ | 12,403 | | |
$ | 4,605 | |
Corporate
bond additions | |
| 500 | | |
| 2,450 | | |
| 3,250 | | |
| 2,950 | |
Corporate
bond fair value adjustments | |
| (967 | ) | |
| 61 | | |
| (1,291 | ) | |
| 49 | |
Balance
at end of period | |
$ | 14,362 | | |
$ | 7,604 | | |
$ | 14,362 | | |
$ | 7,604 | |
Financial Assets Measured on a
Nonrecurring Basis
The Company
uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:
Impaired Loans
Impaired loans
are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated
using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may
be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the
borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured
using the present value of expected future cash flows are not deemed to be measured at fair value.
Other
Real Estate Owned
Other real estate
owned, or REO, obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan
or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition
date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value,
when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals
may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information
available to us. REO carried at fair value is classified as Level 3.
Nonfinancial
assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy
utilized to measure fair value are presented below as of the dates indicated (in thousands):
Schedule of NonFinancial Assets Measured at Fair Value on NonRecurring Basis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
June
30, 2022 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Real
estate owned: | |
| | | |
| | | |
| | | |
| | |
Other
construction and land | |
$ | — | | |
$ | — | | |
$ | 842 | | |
$ | 842 | |
Total | |
$ | — | | |
$ | — | | |
$ | 842 | | |
$ | 842 | |
| |
| | | |
| | | |
| | | |
| | |
| |
December
31, 2021 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Collateral
dependent impaired loans: | |
| | | |
| | | |
| | | |
| | |
One-to
four family residential | |
$ | — | | |
$ | — | | |
$ | 106 | | |
$ | 106 | |
Commercial
real estate | |
| — | | |
| — | | |
| 630 | | |
| 630 | |
Commercial | |
| — | | |
| — | | |
| 28 | | |
| 28 | |
Real
estate owned: | |
| | | |
| | | |
| | | |
| | |
Other
construction and land | |
| — | | |
| — | | |
| 842 | | |
| 842 | |
Total | |
$ | — | | |
$ | — | | |
$ | 1,606 | | |
$ | 1,606 | |
There were no
liabilities measured at fair value on a nonrecurring basis as of June 30, 2022 or December 31, 2021.
Impaired loans
totaling $2.4 million at June 30, 2022 and $2.1 million at December 31, 2021 were measured using the present value of expected
future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.
The following
table provides information describing the unobservable inputs used in Level 3 fair value measurements at June 30, 2022 and December
31, 2021.
Schedule of Unobservable Inputs measured at Fair Value
| |
| |
| |
| June
30, 2022 | | |
| December
31, 2021 | |
| |
Valuation
Technique | |
Unobservable
Input | |
| General
Range | | |
| General
Range | |
Impaired
loans | |
Discounted
Appraisals | |
Collateral
discounts | |
| N/A | | |
| 0%
- 15% | |
Real
estate owned | |
Discounted
Appraisals | |
Collateral
discounts and estimated selling cost | |
| 10%
- 43% | | |
| 10%
- 43% | |
Corporate
bonds | |
Discounted
Cash Flows | |
Recent
similar executed financing transactions | |
| 0%
- 13% | | |
| 0%
- 4% | |
Fair Value of Financial Assets
and Financial Liabilities
The estimated
fair value of the Company’s financial assets and financial liabilities are summarized as follows at the dates indicated (in
thousands):
| |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| | |
Fair
Value Measurements at June 30, 2022 | |
| |
Carrying | | |
| | |
| | |
| | |
| |
| |
Amount | | |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash
and equivalents | |
$ | 142,936 | | |
$ | 142,936 | | |
$ | 142,936 | | |
$ | — | | |
$ | — | |
Securities
available for sale | |
| 116,137 | | |
| 116,137 | | |
| — | | |
| 101,775 | | |
| 14,362 | |
Securities
held to maturity | |
| 5,990 | | |
| 5,947 | | |
| — | | |
| 5,947 | | |
| — | |
Loans
receivable | |
| 952,813 | | |
| 936,240 | | |
| — | | |
| — | | |
| 936,240 | |
Other
investments, at cost | |
| 2,626 | | |
| 2,626 | | |
| — | | |
| 2,626 | | |
| — | |
Accrued
interest receivable | |
| 4,746 | | |
| 4,746 | | |
| — | | |
| 4,746 | | |
| — | |
BOLI | |
| 14,935 | | |
| 14,935 | | |
| — | | |
| 14,935 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand
deposits, money market and savings | |
$ | 927,370 | | |
$ | 927,370 | | |
$ | — | | |
$ | 927,370 | | |
$ | — | |
Time
deposits | |
| 183,731 | | |
| 182,740 | | |
| — | | |
| 182,740 | | |
| — | |
Federal
Home Loan Bank advances | |
| 5,000 | | |
| 5,190 | | |
| — | | |
| 5,190 | | |
| — | |
Junior
subordinated debentures | |
| 35,924 | | |
| 34,357 | | |
| — | | |
| 34,357 | | |
| — | |
Accrued
interest payable | |
| 254 | | |
| 254 | | |
| — | | |
| 254 | | |
| — | |
| |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| | |
Fair
Value Measurements at December 31, 2021 | |
| |
Carrying | | |
| | |
| | |
| | |
| |
| |
Amount | | |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash
and equivalents | |
$ | 124,101 | | |
$ | 124,101 | | |
$ | 124,101 | | |
$ | — | | |
$ | — | |
Securities
available for sale | |
| 111,962 | | |
| 111,962 | | |
| — | | |
| 99,559 | | |
| 12,403 | |
Loans
receivable, net | |
| 933,475 | | |
| 923,958 | | |
| — | | |
| — | | |
| 923,958 | |
Other
investments, at cost | |
| 2,984 | | |
| 2,984 | | |
| — | | |
| 2,984 | | |
| — | |
Accrued
interest receivable | |
| 4,808 | | |
| 4,808 | | |
| — | | |
| 4,808 | | |
| — | |
BOLI | |
| 14,778 | | |
| 14,778 | | |
| — | | |
| 14,778 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand
deposits, money market and savings | |
$ | 850,112 | | |
$ | 850,112 | | |
$ | — | | |
$ | 850,112 | | |
$ | — | |
Time
deposits | |
| 208,929 | | |
| 209,005 | | |
| — | | |
| 209,005 | | |
| — | |
Federal
Home Loan Bank advances | |
| 5,000 | | |
| 5,054 | | |
| — | | |
| 5,054 | | |
| — | |
Junior
subordinated debentures | |
| 35,864 | | |
| 36,113 | | |
| — | | |
| 36,113 | | |
| — | |
Accrued
interest payable | |
| 383 | | |
| 383 | | |
| — | | |
| 383 | | |
| — | |
NOTE
11. BUSINESS COMBINATIONS
On June 21,
2022, the Company entered into the Merger Agreement with First Bancorp, pursuant to which the Company will merge with and into
First Bancorp and the Bank will merge with and into First Bank. As of June 21, 2022, the aggregate merger consideration had a
total value of approximately $181.1 million, or $31.43 per share. As of June 30, 2022, the aggregate merger consideration had
a total value of approximately $183.1 million, or $31.76 per share.
Upon closing,
outstanding and unexercised Company stock options will be converted into stock options to purchase the number of shares of First
Bancorp common stock equal to the product of the number of shares of the Company’s common stock underlying the stock option
immediately prior to closing and 0.910. The exercise price per share of the resulting First Bancorp stock option will be equal
to the exercise price of the converted Company stock option divided by 0.910. Any converted stock option being less than a whole
share of First Bancorp stock being cancelled for a cash payment.
The Merger Agreement
was unanimously approved by the boards of directors of each of the Company and First Bancorp. The closing of the Merger is subject
to the approval of the Company’s shareholders, obtaining the requisite regulatory approvals and other customary closing
conditions. The parties anticipate closing the Merger during the fourth quarter of 2022 or the first quarter of 2023.
The foregoing
description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified
in its entirety be reference to the Merger Agreement, which is incorporated as Exhibit 2.1 to this Quarterly Report on Form 10-Q.
NOTE 12. SUBSEQUENT EVENTS
Management has
evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30, 2022.
The Company does not believe there were any material subsequent events during this period that require further recognition or
disclosure in the unaudited consolidated financial statements included in this report other than the item noted below.
On July 18,
2022, the Company’s Board of Directors approved regular cash dividends of $0.13 per common share and $0.1365 per Series
A preferred share payable on August 18, 2022 to shareholders of record on August 4, 2022.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Quarterly Report
on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1932 (the “Exchange Act”), which can be identified by the
use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,”
“plan,” “continue,” “seek,” “could,” “expect,” “will,” “may”
and words of similar meaning. These forward-looking statements include, but are not limited to (i) our goals, intentions, business plans,
objectives, strategies, projected growth, anticipated future financial performance (including underlying assumptions), and management’s
long-term performance goals, (ii) the anticipated effects or consequences of various transactions or events on our results of operations
and financial condition, including, but not limited to, statements regarding our outlook and expectations with respect to our planned
Merger with First Bancorp, the strategic and financial benefits of the Merger, including the expected impact of the Merger on the combined
company’s scale, deposit franchise, growth and future financial performance, and the timing of the closing of the Merger.
These forward-looking
statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions
with respect to future business strategies and decisions that are subject to change. The Company is under no duty to and does not undertake
any obligation to update any forward-looking statements after the date of this Form 10-Q except as required by law.
The following factors,
among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking
statements:
| · | Changes
in the interest rate environment which could reduce anticipated or actual margins; |
| · | Restrictions
or conditions imposed by our regulators on our operations; |
| · | Increases
in competitive pressure in the banking and financial services industries; |
| · | Changes
in access to funding or increased regulatory requirements with regard to funding; |
| · | Changes
in deposit flows; |
| · | Credit
losses as a result of declining real estate values, increasing interest rates, increasing
unemployment, changes in payment behavior or other factors; |
| · | Credit
losses due to loan concentration; |
| · | Changes
in the amount of our loan portfolio collateralized by real estate and weaknesses in the real
estate market; |
| · | Our
ability to attract and retain key personnel; |
| · | The
success and costs of our expansion into potential new markets; |
| · | Changes
in political conditions or the legislative or regulatory environment, including governmental
initiatives affecting the financial services industry, including as a result of the presidential
administration and Democratic control of Congress; |
| · | Changes
in economic conditions in the United States and the strength of the local economies in which
we conduct our operations, including, but not limited to, due to the continuing negative
impacts and disruptions resulting from the outbreak of COVID-19 on the economies and communities
we serve, which may have an adverse impact on our business, operations and performance, and
could have a negative impact on our credit portfolio, share price, borrowers, and on the
economy as a whole, both domestically and globally; |
| · | Changes
occurring in business conditions and inflation; |
| · | Increased
cybersecurity risk, including potential business disruptions or financial losses; |
| · | The
adequacy of the level of our allowance for loan losses and the amount of loan loss provisions
required in future periods; |
| · | Examinations
by our regulatory authorities, including the possibility that the regulatory authorities
may, among other things, require us to increase our allowance for loan losses or write-down
assets; |
| · | Changes
in monetary and tax policies; |
| · | Risks
associated with actual or potential litigation or investigations by customers, regulatory
agencies or others; |
| · | The
rate of delinquencies and amounts of loans charged-off; |
| · | The
rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; |
| · | Our
ability to maintain appropriate levels of capital and to comply with our capital ratio requirements; |
| · | Adverse
changes in asset quality and resulting credit risk-related losses and expenses; |
| · | Changes
in accounting policies, practices or guidelines; |
| · | Adverse
effects of failures by our vendors to provide agreed upon services in the manner and at the
cost agreed; |
| · | The
potential effects of events beyond our control that may have a destabilizing effect on financial
markets and the economy, such as epidemics and pandemics (including the potential continuing
negative effects of COVID-19 on trade), supply chains disruptions in transportation, war
or terrorist activities, essential utility outages or trade disputes and tariffs; |
| · | the
failure to obtain necessary regulatory approvals with respect to the Merger when expected
or at all (and the risk that such approvals may result in the imposition of conditions that
could adversely affect the combined company or the expected benefits of the transaction); |
| · | the
failure of either company to satisfy any of the other closing conditions to the Merger on
a timely basis or at all; |
| · | the
occurrence of any event, change or other circumstances that could give rise to the right
of one or both of the parties to terminate the Merger Agreement; |
| · | the
possibility that the anticipated benefits of the Merger, including anticipated cost savings
and strategic gains, are not realized when expected or at all, including as a result of the
impact of, or problems arising from, the integration of the two companies or as a result
of the strength of the economy, competitive factors in the areas where we and First Bancorp
do business, or as a result of other unexpected factors or events; |
| · | the
impact of purchase accounting with respect to the Merger, or any change in the assumptions
used regarding the assets purchased and liabilities assumed to determine their fair value; |
| · | diversion
of management’s attention from ongoing business operations and opportunities; |
| · | potential
adverse reactions or changes to business or employee relationships, including those resulting
from the announcement or completion of the Merger; |
| · | the
outcome of any legal proceedings that may be instituted against us and/or First Bancorp in
connection with the Merger; |
| · | the
integration of our business and operations with First Bancorp, which may take longer than
anticipated or be more costly than anticipated or have unanticipated adverse results relating
to our existing business or the existing business of First Bancorp; |
| · | business
disruptions following the Merger; |
| · | other
factors that may affect future results of the combined company including changes in asset
quality and credit risk; the inability to sustain revenue and earnings growth; changes in
interest rates and capital markets; inflation; customer borrowing, repayment, investment
and deposit practices; changes in general economic conditions, including due to the COVID-19
pandemic; the impact, extent and timing of technological changes; capital management activities;
and other actions of the banking regulators and legislative and regulatory actions and reforms;
and |
| · | descriptions
of assumptions underlying or relating to any of the foregoing. |
For additional
information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements,
see “Risk Factors” under Part I, Item 1A of our Form 10-K as filed with the Securities and Exchange Commission (the “SEC”)
on March 31, 2022, (“2021 Form 10-K”).
Non-GAAP
Measures
This Form 10-Q
includes financial information determined by a method other than in accordance with generally accepted accounting principles (“GAAP”).
This financial information includes the operating performance measure “Tangible book value per common share, outstanding”.
Management has
included this non-GAAP measure because it believes this measure may provide useful supplemental information for evaluating the Company’s
underlying performance trends. Further, management uses this measure in managing and evaluating the Company’s business and intends
to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to,
and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP
measures that may be presented by other companies.
Critical Accounting Estimates
Our critical
accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements
as of June 30, 2022 have remained unchanged from the disclosures presented in our 2021 Form 10-K. Refer to Note 1 in the notes to the
consolidated financial statements included under Item 1 -“Financial Statements” of this Form 10-Q for more information about
recent accounting updates.
Overview
GrandSouth Bancorporation
(“we,” “us,” “our,” or the “Company”) was incorporated in 2000 under the laws of South
Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s primary purpose is
to serve as the holding company for GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to a Plan of Exchange approved
by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company,
and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other
than that of owning the Bank and has no employees.
The
Company has one non-bank subsidiary, GrandSouth Capital Trust I (the “Trust”), a Delaware statutory trust, formed to facilitate
the issuance of trust preferred securities. The GrandSouth Trust is not consolidated in the Company’s financial statements.
We
provide a full range of financial services through offices located throughout South Carolina. We provide full-service retail and commercial
banking products.
Our results
of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as
changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable
laws, regulations or government policies may materially affect our financial condition and results of operations.
The following
discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and
significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in
conjunction with the financial statements and the related notes and the other statistical information included in this Form 10-Q and
in our 2021 Form 10-K.
Discussion
of Financial Condition
General
Total assets
increased $50.3 million to $1.3 billion at June 30, 2022, or 4.18%, from December 31, 2021. This increase in assets was primarily due
to increases in cash and cash equivalents of $18.8 million and loans of $19.3 million.
Total liabilities
increased $51.6 million to $1.2 billion at June 30, 2022, or 4.66%, from December 31, 2021, due primarily to increases in total deposits
of $52.1 million, which includes increases in interest-bearing deposits of $31.2 million.
Total shareholders’
equity decreased $1.3 million to $96.1 million, or 4.18%, from December 31, 2021, due changes in the fair value of AFS investments and
payment of dividends partially offset by normal retention of earnings, exercise of stock options, and stock-based compensation expense.
Book Value per common share decreased $0.39 to $18.22 at June 30, 2022 from $18.61 at December 31, 2021. Tangible book value per common
share, a non-GAAP measure, also decreased $0.39 to $18.08 at June 30, 2022 from $18.47 at December 31, 2021.
The following
is a reconciliations of book value to book value per common share and book value to tangible book value per common share for the periods
indicated:
| |
As Of | |
(in thousands, except share data) | |
June 30, 2022 | | |
December 31, 2021 | |
Book Value (GAAP) | |
$ | 96,121 | | |
$ | 97,405 | |
Book Value Attributable to Preferred Shares | |
| (1,204 | ) | |
| (1,204 | ) |
Book Value Attributable to Common Shares | |
| 94,917 | | |
| 96,201 | |
Outstanding common shares | |
| 5,209,542 | | |
| 5,168,681 | |
Book Value Per Common Share | |
$ | 18.22 | | |
$ | 18.61 | |
| |
| | | |
| | |
Book Value (GAAP) | |
$ | 96,121 | | |
$ | 97,405 | |
Book Value Attributable to Preferred Shares | |
| (1,204 | ) | |
| (1,204 | ) |
Book Value Attributable to Common Shares | |
| 94,917 | | |
| 96,201 | |
Goodwill and intangibles | |
| (737 | ) | |
| (737 | ) |
Book Value Attributable to Common Shares (Tangible) | |
$ | 94,180 | | |
$ | 95,464 | |
Outstanding common shares | |
| 5,209,542 | | |
| 5,168,681 | |
Tangible Book Value Per Common Share | |
$ | 18.08 | | |
$ | 18.47 | |
Cash and
Cash Equivalents
Total cash and
cash equivalents increased $18.8 million to $142.9 million at June 30, 2022 from $124.1 million at December 31, 2021, primarily due to
the increase in customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will
continue to hold adequate levels of liquid and short-term assets.
Investment
Securities
Our investment
securities portfolio is classified as either AFS or HTM. The following table shows the amortized cost and fair value for our AFS and
HTM investment portfolios at the dates indicated (in thousands).
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
Amortized
Cost | | |
Fair Value | | |
Amortized
Cost | | |
Fair Value | |
Available for sale | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | 27,451 | | |
$ | 25,998 | | |
$ | 9,479 | | |
$ | 9,439 | |
State and municipal obligations | |
| 25,930 | | |
| 22,475 | | |
| 26,011 | | |
| 26,677 | |
Mortgage-backed securities - agency | |
| 30,245 | | |
| 28,040 | | |
| 33,191 | | |
| 33,418 | |
Collateralized mortgage obligations - agency | |
| 24,124 | | |
| 23,045 | | |
| 26,968 | | |
| 27,435 | |
Asset-backed securities | |
| 2,311 | | |
| 2,217 | | |
| 2,599 | | |
| 2,590 | |
Corporate bonds | |
| 15,450 | | |
| 14,362 | | |
| 12,200 | | |
| 12,403 | |
| |
$ | 125,511 | | |
$ | 116,137 | | |
$ | 110,448 | | |
$ | 111,962 | |
| |
| | | |
| | | |
| | | |
| | |
Held to maturity | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | 5,990 | | |
$ | 5,947 | | |
$ | — | | |
$ | — | |
| |
$ | 5,990 | | |
$ | 5,947 | | |
$ | — | | |
$ | — | |
AFS investment
securities increased $4.2 million, or 3.73%, to $116.1 million at June 30, 2022 from $112.0 million at December 31, 2021. During the
six months ended June 30, 2022, $3.3 million of AFS corporate bonds and $18.0 of AFS U.S. government agencies were purchased. HTM investment
securities increased $6.0 million, to $6.0 million at June 30, 2022 from zero million at December 31, 2021. During the six months ended
June 30, 2022, $6.0 million of HTM U.S. government agencies were purchased. We continue to look for opportunities to re-deploy funds
from investment securities to higher yielding loans.
Management of
the Company believes all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit
deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the
table below before recovery of their amortized cost.
The composition
and maturities of the AFS and HTM investment securities portfolios at June 30, 2022 are summarized in the following table (in thousands).
Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may
occur. The composition and maturity distribution of the securities portfolio is subject to change depending on rate sensitivity, capital,
and liquidity needs. The weighted average yield for the month ended June 30, 2022 was calculated using net income (interest accrual plus
or minus accretion/amortization) divided by ending book value.
| |
Less than one year | | |
More than one year
through five years | | |
More than five years
through ten years | | |
More than ten years | | |
Total securities | |
| |
Amortized Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | |
Available for sale | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | — | | |
| 0.00 | % | |
$ | 17,971 | | |
| 1.48 | % | |
$ | 9,480 | | |
| 1.31 | % | |
$ | — | | |
| 0.00 | % | |
$ | 27,451 | | |
| 1.42 | % |
State and municipal obligations | |
| — | | |
| 0.00 | % | |
| — | | |
| 0.00 | % | |
| 7,378 | | |
| 2.05 | % | |
| 18,552 | | |
| 2.35 | % | |
| 25,930 | | |
| 2.26 | % |
Mortgage-backed securities - agency | |
| — | | |
| 0.00 | % | |
| 147 | | |
| 3.82 | % | |
| 7,887 | | |
| 1.57 | % | |
| 22,211 | | |
| 1.45 | % | |
| 30,245 | | |
| 1.49 | % |
Collateralized mortgage obligations - agency | |
| — | | |
| 0.00 | % | |
| — | | |
| 0.00 | % | |
| 12,214 | | |
| 2.20 | % | |
| 11,910 | | |
| -0.11 | % | |
| 24,124 | | |
| 1.06 | % |
Asset-backed securities | |
| — | | |
| 0.00 | % | |
| — | | |
| 0.00 | % | |
| 513 | | |
| 1.33 | % | |
| 1,798 | | |
| 1.67 | % | |
| 2,311 | | |
| 1.60 | % |
Corporate bonds | |
| — | | |
| 0.00 | % | |
| — | | |
| 0.00 | % | |
| 14,700 | | |
| 4.03 | % | |
| 750 | | |
| 4.92 | % | |
| 15,450 | | |
| 4.07 | % |
Total securities available-for-sale | |
$ | — | | |
| 0.00 | % | |
$ | 18,118 | | |
| 1.50 | % | |
$ | 52,172 | | |
| 2.43 | % | |
$ | 55,221 | | |
| 1.47 | % | |
$ | 125,511 | | |
| 1.87 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Held to maturity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. government agencies | |
$ | — | | |
| 0.00 | % | |
$ | 5,990 | | |
| 2.57 | % | |
$ | — | | |
| 0.00 | % | |
$ | — | | |
| 0.00 | % | |
$ | 5,990 | | |
| 2.57 | % |
Total securities held to maturity | |
$ | — | | |
| 0.00 | % | |
$ | 5,990 | | |
| 2.57 | % | |
$ | — | | |
| 0.00 | % | |
$ | — | | |
| 0.00 | % | |
$ | 5,990 | | |
| 2.57 | % |
Loans
The following
table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated (in thousands).
Other construction and land loans include residential acquisition and development loans and loans on commercial undeveloped land and
one-to-four family improved and unimproved lots. Commercial real estate loans include loans on non-residential owner-occupied and non-owner-occupied
real estate, multi-family, and owner-occupied investment property. Commercial and industrial loans include unsecured commercial loans
and commercial loans secured by business assets.
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
Balance | | |
Percent | | |
Balance | | |
Percent | |
Real estate mortgage loans: | |
| | | |
| | | |
| | | |
| | |
One-to four-family residential | |
$ | 145,229 | | |
| 15.23 | | |
$ | 132,836 | | |
| 14.22 | |
Commercial real estate | |
| 411,190 | | |
| 43.13 | | |
| 423,552 | | |
| 45.36 | |
Home equity loans and lines of credit | |
| 21,389 | | |
| 2.24 | | |
| 21,568 | | |
| 2.31 | |
Residential construction | |
| 36,443 | | |
| 3.82 | | |
| 38,881 | | |
| 4.16 | |
Other construction and land | |
| 82,223 | | |
| 8.62 | | |
| 75,682 | | |
| 8.10 | |
Commercial | |
| 250,584 | | |
| 26.30 | | |
| 234,355 | | |
| 25.09 | |
Consumer | |
| 6,275 | | |
| 0.66 | | |
| 7,129 | | |
| 0.76 | |
Loans receivable, gross | |
| 953,333 | | |
| 100.00 | | |
| 934,003 | | |
| 100.00 | |
Net deferred loan costs (fees) | |
| (520 | ) | |
| | | |
| (528 | ) | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Loans receivable, net of deferred fees | |
$ | 952,813 | | |
| | | |
$ | 933,475 | | |
| | |
Commercial real estate
loan balances contracted during year to date primarily due to significant paydowns of existing loans.
Included in commercial
loans are PPP loans totaling zero and $1.3 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, all
PPP loans were paid off or forgiven by the SBA.
Delinquent Loans
When a loan
becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more
past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally
issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the
event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank,
the borrower is referred to the Bank’s Credit Administration staff to explore restructuring alternatives to foreclosure. Once the
demand period has expired and it has been determined that restructuring is not a viable option, the Bank’s counsel is instructed
to pursue foreclosure.
The accrual
of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first,
unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on
nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding
until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis
if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while
the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.
If a loan is
modified in a troubled debt restructure (“TDR”), the loan is generally placed on non-accrual until there is a period of satisfactory
payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the
ultimate collectability of all amounts contractually due is not in doubt. For a discussion of TDRs, see the section entitled “Troubled
Debt Restructurings” below.
The following
table sets forth certain information with respect to our loan portfolio carrying balances of delinquencies at the dates indicated (in
thousands). We had no loans 90 days or more past due and still accruing interest as of June 30, 2022. We had no loans 90 days or
more past due that are still accruing interest as of December 31, 2021 that are not 98% guaranteed by the issuing agency. The decrease
in past due consumer loans is primarily attributable to the sale of the purchased student loan portfolio, the balance of which, as of
December 31, 2021, was $0.7 million, and decreased to zero as of June 30, 2022.
| |
Delinquent loans | |
| |
30-59 Days | | |
60-89 Days | | |
90 Days and
Over | | |
Total | |
June 30, 2022 | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
$ | — | | |
$ | 39 | | |
$ | — | | |
$ | 39 | |
Commercial | |
| — | | |
| — | | |
| 54 | | |
| 54 | |
Total delinquent loans | |
$ | — | | |
$ | 39 | | |
$ | 54 | | |
$ | 93 | |
Percent of total loans, net | |
| 0.00 | % | |
| 0.00 | % | |
| 0.01 | % | |
| 0.01 | % |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
$ | — | | |
$ | — | | |
$ | 50 | | |
$ | 50 | |
Commercial | |
| 54 | | |
| — | | |
| — | | |
| 54 | |
Consumer | |
| — | | |
| — | | |
| 590 | | |
| 590 | |
Total | |
$ | 54 | | |
$ | — | | |
$ | 640 | | |
$ | 694 | |
Percent of total loans, net | |
| 0.01 | % | |
| 0.00 | % | |
| 0.07 | % | |
| 0.07 | % |
Total
delinquencies as a percentage of loans decreased from 0.07% at December 31, 2021 to 0.01% at June 30, 2022. Delinquent loans decreased
$0.6 million, or 86.60%, to $0.1 million at June 30, 2022 from $0.7 million at December 31, 2021. We continue to focus on collection
efforts and favorable resolutions.
Nonperforming Assets
Nonperforming loans
include all loans past due 90 days and over that are not 98% guaranteed by the issuing agency, certain impaired loans, and TDR loans
that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Nonperforming
assets include nonperforming loans and other real estate owned (“REO”). The table below sets forth the amounts and categories
of our nonperforming assets at the dates indicated (in thousands).
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Nonaccrual loans: | |
| | | |
| | |
Real estate loans: | |
| | | |
| | |
One-to-four family residential | |
$ | 24 | | |
$ | 107 | |
Commercial | |
| — | | |
| 767 | |
Commercial | |
| 289 | | |
| 473 | |
Consumer | |
| — | | |
| 2 | |
Total nonperforming loans | |
| 313 | | |
| 1,349 | |
| |
| | | |
| | |
REO: | |
| | | |
| | |
Other construction and land | |
| 842 | | |
| 842 | |
Total foreclosed real estate | |
| 842 | | |
| 842 | |
Total nonperforming assets | |
$ | 1,155 | | |
$ | 2,191 | |
| |
| | | |
| | |
TDRs still accruing | |
$ | 1,682 | | |
$ | 1,780 | |
| |
| | | |
| | |
Ratios: | |
| | | |
| | |
Nonperforming loans to total loans | |
| 0.03 | % | |
| 0.14 | % |
Nonperforming assets to total assets | |
| 0.09 | % | |
| 0.18 | % |
The decrease
in nonperforming loans and nonperforming assets is the result of the successful resolution and disposal of nonperforming loans and nonperforming
assets by means of restructure, foreclosure, deed in lieu of foreclosure and sales.
Troubled Debt Restructurings
In situations where,
for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession that we would not otherwise
consider, for other than an insignificant period of time, the related loan is classified as a TDR. We strive to identify borrowers in
financial difficulty early so that we may work with them to modify their loans before they reach nonaccrual status. Modified terms generally
include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics,
reductions in contractual interest rates, periods of interest-only payments, and principal deferments. A restructuring that results in
only a delay in payments that is insignificant is not considered an economic concession. While unusual, there may be instances of forgiveness
of loan principal. We individually evaluate all substandard loans that experience a modification of terms to determine if a TDR has occurred.
All TDRs over $200,000
are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies
an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable
risk and the ultimate collectability of all amounts contractually due is not in doubt. We may also remove a loan from TDR and impaired
status if the loan is subsequently restructured and at the time of the subsequent restructuring the borrower is not experiencing financial
difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted to the borrower.
Classification of
Loans
The following
table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as “doubtful”
or “loss” are charged off immediately (in thousands).
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Classified loans: | |
| | | |
| | |
Substandard | |
$ | 2,968 | | |
$ | 4,304 | |
Doubtful | |
| — | | |
| — | |
Loss | |
| — | | |
| — | |
Total classified loans: | |
| 2,968 | | |
| 4,304 | |
Special mention | |
| 7,720 | | |
| 9,647 | |
Total criticized loans | |
$ | 10,688 | | |
$ | 13,951 | |
| |
| | | |
| | |
Total classified loans as a % of total loans, net | |
| 0.31 | % | |
| 0.46 | % |
Total criticized loans as a % of total loans, net | |
| 1.12 | % | |
| 1.49 | % |
Management continues
to dedicate resources to monitoring and resolving classified and criticized loans.
Allowance for Loan Losses
The allowance
for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for
loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability
of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers’
abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology
for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation
of certain groups of homogeneous loans with similar risk characteristics.
A loan is considered
impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual
terms of the loan. We individually evaluate loans, or relationships, greater than $200,000 for impairment that are classified as nonaccrual,
TDRs, or performing substandard loans. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the
appraised value of the property less an estimate of selling costs if foreclosure or sale of the property is anticipated. If the impaired
loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after
consideration of modifications and the likelihood of future default and prepayment.
The allowance
for homogenous loans consists of a base loss reserve and a qualitative reserve. The loss rates for the base loss reserve, segmented into
seven loan categories, contain average net loss rates ranging from approximately 0.00% to 0.54%.
The qualitative
reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external factors:
| · | Changes
in lending and loan review policies; |
| · | Economic
conditions – including unemployment rates, federal macroeconomic data, housing prices
and sales, and regional economic outlooks; |
| · | Changes
in the nature and volume of the portfolio and in the terms of the loans; |
| · | Experience,
ability, and depth of lending management; |
| · | Volume
and severity of past due, nonaccrual, and classified loans; |
| · | Changes
in the quality of the institution’s loan review system; |
| · | Loan
concentrations and loan growth; and |
| · | The
effect of other external factors such as competition, legal and regulatory requirements on
the level of estimated credit losses. |
Qualitative reserve
adjustment factors are decreased for favorable trends and increased for unfavorable trends. There is no certainty that our allowance
for loan losses will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ
from our reasonable and supportable forecast.
The following
table summarizes the net charge-off detail as a percentage of average loans by loan composition for the periods indicated (in thousands).
| |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
Percent | | |
Amount | | |
Percent | |
Real Estate: | |
| | | |
| | | |
| | | |
| | |
One-to-four family residential | |
$ | (108 | ) | |
| -0.06 | % | |
$ | 10 | | |
| 0.01 | % |
Commercial real estate | |
| (52 | ) | |
| -0.01 | % | |
| — | | |
| 0.00 | % |
Home equity loans and lines of credit | |
| — | | |
| 0.00 | % | |
| — | | |
| 0.00 | % |
Residential construction | |
| — | | |
| 0.00 | % | |
| — | | |
| 0.00 | % |
Other construction and land | |
| (19 | ) | |
| -0.02 | % | |
| (17 | ) | |
| -0.02 | % |
Commercial | |
| 219 | | |
| 0.07 | % | |
| (195 | ) | |
| -0.06 | % |
Consumer | |
| 10 | | |
| 0.11 | % | |
| — | | |
| 0.00 | % |
Total | |
$ | 50 | | |
| | | |
$ | (202 | ) | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Ratios: | |
| | | |
| | | |
| | | |
| | |
Net charge-offs to average loans outstanding | |
| | | |
| 0.01 | % | |
| | | |
| (0.02 | )% |
Allowance to nonperforming loans at period end (1) | |
| | | |
| 4504.79 | % | |
| | | |
| 987.77 | % |
Allowance to total loans at period end | |
| | | |
| 1.48 | % | |
| | | |
| 1.47 | % |
(1) | At
June 30, 2022, total nonperforming loans were comprised of nonaccrual loans and loans 90
days past due and still accruing. |
Our allowance as a
percentage of total loans increased to 1.48% at June 30, 2022 from 1.47% at December 31, 2021, and 1.47% at June 30, 2021, primarily
as the result of loan growth in our CarBucks segment, which maintains a higher reserve allocation.
We have continued to
experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used
in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the
calculation as time passes. Our coverage ratio of nonperforming loans increased to 4,504.79% at June 30, 2022 from 1,017.27% at December
31, 2021 primarily as the result of the decreased balance of nonperforming loans during the period.
Deposits
The following
table presents deposits by category and percentage of total deposits as of the periods indicated (in thousands).
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
Balance | | |
Percent | | |
Balance | | |
Percent | |
Noninterest-bearing demand | |
$ | 301,487 | | |
| 27.1 | | |
$ | 280,665 | | |
| 26.5 | |
Interest-bearing demand | |
| 65,557 | | |
| 5.9 | | |
| 52,479 | | |
| 5.0 | |
Money Market | |
| 543,606 | | |
| 49.0 | | |
| 500,862 | | |
| 47.3 | |
Savings | |
| 16,720 | | |
| 1.5 | | |
| 16,106 | | |
| 1.5 | |
Time Deposits | |
| 183,731 | | |
| 16.5 | | |
| 208,929 | | |
| 19.7 | |
| |
$ | 1,111,101 | | |
| 100.0 | | |
$ | 1,059,041 | | |
| 100.0 | |
At June 30,
2022 and December 31, 2021, we estimate that we have approximately $443.8 million and $393.8 million, respectively, in uninsured deposits
including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits,
these amounts are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements
by the FDIC for the Call Report.
As indicated
in the above table, deposit balances increased approximately $52.1 million, or 4.92%, for the six months ended June 30, 2022 compared
to December 31, 2021. The increase in total deposits was mainly attributable to the $42.7 million, or 8.53%, increase in money market
accounts, the $13.1 million, or 24.92%, increase in interest-bearing demand accounts and $20.8 million, or 7.42%, increase in noninterest-bearing
demand accounts, partially offset by a $25.2 million, or 12.06%, decline in time deposits.
Discussion of Results
of Operation
Comparison
of the Three Months Ended June 30, 2022 and June 30, 2021.
General
Net income
for the three months ended June 30, 2022 was $3.7 million, compared to $4.0 million for the same period in 2021. The decrease in net
income for the period was primarily the result of increases in noninterest expenses totaling $1.6 million, partially offset by an increase
in net interest income of $1.3 million. Of noninterest expenses during second quarter, $0.9 million is related to the Company’s
pending merger with First Bancorp.
Net Interest Income
Net interest income
increased $1.3 million, or 10.44%, to $13.4 million for the three months ended June 30, 2022, compared to $12.1 million for the same
period in 2021. The increase in net interest income was primarily due to a higher volume in CarBucks loans and yields on taxable investments
and federal funds sold and other interest earning deposits. This was partially offset by the decline in yields on our CarBucks loans
and the increase in money market account interest rates.
The following table
sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning
assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting
average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were
included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set
forth below include the effect of deferred fees and costs that are amortized or accreted to interest income or expense.
| |
For the Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Average
Outstanding
Balance | | |
Interest | | |
Yield/ Rate | | |
Average
Outstanding
Balance | | |
Interest | | |
Yield/ Rate | |
| |
(Dollars in thousands) | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans, Core Bank(1) | |
$ | 825,660 | | |
$ | 8,559 | | |
| 4.16 | % | |
$ | 817,045 | | |
$ | 8,397 | | |
| 4.12 | % |
Loans, Carbucks(2) | |
| 108,963 | | |
| 5,205 | | |
| 19.16 | % | |
| 82,789 | | |
| 4,512 | | |
| 21.86 | % |
Investments - taxable | |
| 112,285 | | |
| 533 | | |
| 1.90 | % | |
| 118,227 | | |
| 358 | | |
| 1.21 | % |
Investments - tax exempt(3) | |
| 11,141 | | |
| 88 | | |
| 3.17 | % | |
| 12,648 | | |
| 89 | | |
| 2.82 | % |
Federal funds sold and other interest earning deposits | |
| 155,351 | | |
| 218 | | |
| 0.56 | % | |
| 76,508 | | |
| 23 | | |
| 0.12 | % |
Other investments, at cost | |
| 2,618 | | |
| 14 | | |
| 2.14 | % | |
| 5,248 | | |
| 31 | | |
| 2.37 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-earning assets | |
| 1,216,018 | | |
| 14,617 | | |
| 4.82 | % | |
| 1,112,465 | | |
| 13,410 | | |
| 4.84 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-earning assets | |
| 36,844 | | |
| | | |
| | | |
| 37,716 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,252,862 | | |
| | | |
| | | |
$ | 1,150,181 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings accounts | |
$ | 16,999 | | |
$ | 4 | | |
| 0.09 | % | |
$ | 12,560 | | |
$ | 3 | | |
| 0.10 | % |
Time deposits | |
| 192,422 | | |
| 144 | | |
| 0.30 | % | |
| 249,266 | | |
| 296 | | |
| 0.48 | % |
Money market accounts | |
| 545,251 | | |
| 583 | | |
| 0.43 | % | |
| 427,155 | | |
| 462 | | |
| 0.43 | % |
Interest bearing transaction accounts | |
| 58,774 | | |
| 27 | | |
| 0.18 | % | |
| 67,423 | | |
| 42 | | |
| 0.25 | % |
Total interest bearing deposits | |
| 813,446 | | |
| 758 | | |
| 0.37 | % | |
| 756,404 | | |
| 803 | | |
| 0.43 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FHLB advances | |
| 5,000 | | |
| 5 | | |
| 0.40 | % | |
| 16,000 | | |
| 36 | | |
| 0.91 | % |
Junior subordinated debentures | |
| 35,906 | | |
| 450 | | |
| 5.03 | % | |
| 35,786 | | |
| 432 | | |
| 4.84 | % |
Other borrowings | |
| 1 | | |
| — | | |
| 0.00 | % | |
| — | | |
| — | | |
| 0.00 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-bearing liabilities | |
| 854,353 | | |
| 1,213 | | |
| 0.57 | % | |
| 808,190 | | |
| 1,271 | | |
| 0.63 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-bearing deposits | |
| 295,671 | | |
| | | |
| | | |
| 248,506 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other non interest bearing liabilities | |
| 5,499 | | |
| | | |
| | | |
| 5,780 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities | |
| 1,155,523 | | |
| | | |
| | | |
| 1,062,476 | | |
| | | |
| | |
Total equity | |
| 97,339 | | |
| | | |
| | | |
| 87,705 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities and equity | |
$ | 1,252,862 | | |
| | | |
| | | |
$ | 1,150,181 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tax-equivalent net interest income | |
| | | |
$ | 13,404 | | |
| | | |
| | | |
$ | 12,139 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest-earning assets(4) | |
$ | 361,665 | | |
| | | |
| | | |
$ | 304,275 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Average interest-earning assets to interest-bearing liabilities | |
| 142.33 | % | |
| | | |
| | | |
| 137.65 | % | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tax-equivalent net interest rate spread(5) | |
| | | |
| | | |
| 4.25 | % | |
| | | |
| | | |
| 4.21 | % |
Tax-equivalent net interest margin(6) | |
| | | |
| | | |
| 4.42 | % | |
| | | |
| | | |
| 4.38 | % |
(1) |
Core Bank is the bank’s primary business
to provide traditional deposit and lending products and services to commercial and retail banking clients. |
(2) |
Carbucks is the bank’s division that provides
specialty floor plan lending to small automobile dealers in over 20 states. |
(3) |
Tax exempt investments are calculated giving effect
to a 21% federal tax rate, or $19,000 and $19,000 for the three months ended June 30, 2022 and 2021, respectively. |
(4) |
Net interest-earning assets represents total interest-earning
assets less total interest-bearing liabilities. |
(5) |
Tax-equivalent net interest rate spread represents
the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(6) |
Tax-equivalent net interest margin represents
tax equivalent net interest income divided by average total interest-earning assets. |
The following
table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable
to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes
of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on
the absolute values of changes due to rate and the changes due to volume.
| |
For the Three Months Ended June 30, 2022 | |
| |
Compared to the Three Months Ended June 30, 2021 | |
| |
Increase (decrease) due to: | |
(In thousands) | |
Volume | | |
Rate | | |
Total | |
Interest-earning assets: | |
| | | |
| | | |
| | |
Loans - Core Bank (1) | |
$ | 89 | | |
$ | 73 | | |
$ | 162 | |
Loans - CarBucks (1) | |
| 1,300 | | |
| (607 | ) | |
| 693 | |
Investment - taxable | |
| (19 | ) | |
| 194 | | |
| 175 | |
Investments - tax exempt (2) | |
| (11 | ) | |
| 10 | | |
| (1 | ) |
Interest-earning deposits | |
| 43 | | |
| 152 | | |
| 195 | |
Other investments, at cost | |
| (14 | ) | |
| (3 | ) | |
| (17 | ) |
Total interest-earning assets | |
| 1,388 | | |
| (181 | ) | |
| 1,207 | |
| |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | |
Savings accounts | |
| 1 | | |
| — | | |
| 1 | |
Time deposits | |
| (58 | ) | |
| (94 | ) | |
| (152 | ) |
Money market accounts | |
| 126 | | |
| (5 | ) | |
| 121 | |
Interest bearing transaction accounts | |
| (5 | ) | |
| (10 | ) | |
| (15 | ) |
FHLB advances | |
| (17 | ) | |
| (14 | ) | |
| (31 | ) |
Junior subordinated debentures | |
| 1 | | |
| 17 | | |
| 18 | |
Other borrowings | |
| 1 | | |
| — | | |
| 1 | |
Total interest-bearing liabilities | |
| 49 | | |
| (106 | ) | |
| (57 | ) |
Change in tax-equivalent net interest income | |
$ | 1,339 | | |
$ | (75 | ) | |
$ | 1,264 | |
(1) |
Nonaccrual loans are included in the above analysis. |
(2) |
Interest income on tax exempt loans and investments
are adjusted for based on a 21% federal tax rate. |
Net interest
income before provision for loan losses increased to $13.4 million for the three months ended June 30, 2022, compared to $12.1 million
for the same period in 2021, due to improvements in volume, partially offset by unfavorable movements in interest rates.
The increase
in tax-equivalent net interest income of $1.3 million related to volume was primarily the result of higher average loan (both Core Bank
and CarBucks) which increased $34.8 million, and a $56.8 million decrease in average time deposits for the three months ended June 30,
2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases
of $118.1 million in money market balances.
The decrease
in tax-equivalent net interest income of $0.1 million related to rate was primarily the result of decreased yields on CarBucks loans,
partially offset by increased yields on investments and interest-earning deposits and decreased costs on time deposits.
Our tax-equivalent
net interest margin was 4.42% for the three months ended June 30, 2022, compared to 4.38% for the same period in 2021, an increase of
four basis points. The increase in net interest margin was primarily attributable to higher average loan balances combined with interest
rate reductions on our cost of funds partially offset by reduced yields on our CarBucks loans.
Provision for Loan
Losses
We recorded a provision
for loan losses for the three months ended June 30, 2022 of $0.1 million due to organic loan growth. This compares to a $0.3 million
provision for loan losses in for the same period in 2021. We are experiencing continued stabilization in asset quality, low charge-off
amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions,
labor shortages and the associated impact on monetary policy, there is a risk that loss rates could increase.
Noninterest Income
The following table
summarizes the components of noninterest income and the corresponding changes between the three months ended June 30, 2022 and 2021 (in
thousands):
| |
Three Months Ended June 30, | | |
| |
| |
2022 | | |
2021 | | |
Change | |
Service charges on deposit accounts | |
$ | 368 | | |
$ | 322 | | |
$ | 46 | |
Bank owned life insurance | |
| 78 | | |
| 85 | | |
| (7 | ) |
Net gain on sale of premises and equipment | |
| 12 | | |
| 78 | | |
| (66 | ) |
Other noninterest income | |
| 179 | | |
| 283 | | |
| (104 | ) |
Total noninterest income | |
$ | 637 | | |
$ | 768 | | |
$ | (131 | ) |
Our noninterest
income decreased $0.1 million to $0.6 million in the three months ended June 30, 2022, compared to the same period in 2021 due primarily
to decreases in net gain on sale of premises and equipment and other noninterest income, partially offset by an increase in service charges
on deposit accounts.
Noninterest Expense
The following table summarizes the components
of noninterest expense and the corresponding change between the three months ended June 30, 2022 and 2021 (in thousands):
| |
Three Months Ended June 30, | | |
| |
| |
2022 | | |
2021 | | |
Change | |
Compensation and employee benefits | |
$ | 5,679 | | |
$ | 4,987 | | |
$ | 692 | |
Net occupancy | |
| 571 | | |
| 584 | | |
| (13 | ) |
Federal deposit insurance | |
| 102 | | |
| 172 | | |
| (70 | ) |
Professional and advisory | |
| 1,177 | | |
| 265 | | |
| 912 | |
Data processing | |
| 520 | | |
| 494 | | |
| 26 | |
Marketing and advertising | |
| 42 | | |
| 35 | | |
| 7 | |
Net cost of operation of real estate owned | |
| 13 | | |
| 19 | | |
| (6 | ) |
Other noninterest expense | |
| 923 | | |
| 847 | | |
| 76 | |
Total noninterest expenses | |
$ | 9,027 | | |
$ | 7,403 | | |
$ | 1,624 | |
Our noninterest expense
increased $1.6 million to $9.0 million in the three months ended June 30, 2022, compared to the same period in 2021, primarily as the
result of increases in compensation and employee benefits of $0.7 million and increases in professional and advisory expenses of $0.9
million. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined
with annual raises and increases in employee benefits, incentives and commissions. The increase in professional and advisory expenses
is primarily related to our pending merger with First Bancorp.
Income Taxes
Income tax expense
totaled $1.2 million for the three months ended June 30, 2022, compared to $1.2 million for the same period in 2021. Income tax expense
benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 24.3% and
23.4% for the three months ended June 30, 2022 and 2021, respectively.
We continue to have
unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.
Discussion of Segment Results
for the Quarter
See Note 9,
“Reportable Segments” in notes to the consolidated financial statements included under Item 1 -“Financial Statements”
for additional disclosures related to our reportable business segments. Fluctuations in noninterest income and noninterest expense incurred
directly by the segments are more fully discussed in the “Noninterest income” and “Noninterest expense” sections
above.
Comparison
of the Three Months Ended June 30, 2022 and 2021.
| |
As of and for the Three Months Ended June 30, 2022 | |
| |
Core Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest income | |
$ | 8,789 | | |
$ | 5,205 | | |
$ | 604 | | |
$ | 14,598 | |
Interest expense | |
| 7 | | |
| 756 | | |
| 450 | | |
| 1,213 | |
Net interest income | |
| 8,782 | | |
| 4,449 | | |
| 154 | | |
| 13,385 | |
Provision for loan losses | |
| 157 | | |
| (38 | ) | |
| — | | |
| 119 | |
Noninterest income | |
| 502 | | |
| 57 | | |
| 78 | | |
| 637 | |
Noninterest expense | |
| 5,325 | | |
| 2,786 | | |
| 916 | | |
| 9,027 | |
Net income before taxes | |
| 3,802 | | |
| 1,758 | | |
| (684 | ) | |
| 4,876 | |
Income tax expense | |
| 878 | | |
| 425 | | |
| (120 | ) | |
| 1,183 | |
Net income | |
$ | 2,924 | | |
$ | 1,333 | | |
$ | (564 | ) | |
$ | 3,693 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,010,324 | | |
$ | 106,307 | | |
$ | 137,401 | | |
$ | 1,254,032 | |
| |
As of and for the Three Months Ended June 30, 2021 | |
| |
Core Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest income | |
$ | 8,449 | | |
$ | 4,512 | | |
$ | 430 | | |
$ | 13,391 | |
Interest expense | |
| 499 | | |
| 340 | | |
| 432 | | |
| 1,271 | |
Net interest income | |
| 7,950 | | |
| 4,172 | | |
| (2 | ) | |
| 12,120 | |
Provision for loan losses | |
| 68 | | |
| 241 | | |
| — | | |
| 309 | |
Noninterest income | |
| 577 | | |
| 38 | | |
| 153 | | |
| 768 | |
Noninterest expense | |
| 4,941 | | |
| 2,440 | | |
| 22 | | |
| 7,403 | |
Net income before taxes | |
| 3,518 | | |
| 1,529 | | |
| 129 | | |
| 5,176 | |
Income tax expense | |
| 826 | | |
| 356 | | |
| 31 | | |
| 1,213 | |
Net income | |
$ | 2,692 | | |
$ | 1,173 | | |
$ | 98 | | |
$ | 3,963 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 930,199 | | |
$ | 86,833 | | |
$ | 146,439 | | |
$ | 1,163,471 | |
Core Bank
Core Bank consists
of commercial and consumer lending and full-service branches in its geographic region with its own management team. The branches provide
a full range of traditional banking products as well as treasury services and merchant services.
Core Bank net income
increased $0.2 million to $2.9 million for the three months ended June 30, 2022 compared to $2.7 million for the same period in 2021.
Net interest income increased $0.8 million to $8.8 million for the three months ended June 30, 2022 from $8.0 million for the same period
a year ago primarily due to increased yields on taxable investments and federal funds sold and other interest earning deposits, partially
offset by an increase in interest rates on money market accounts. Provision for loan losses increased $0.1 million for the three months
ended June 30, 2022 compared to 2021 due to higher organic loan growth, partially offset by lower net charge off activity during the
second quarter of 2022 as compared to the second quarter of 2021. Noninterest expense increased $0.4 million to $5.3 million for the
2022 period compared to $4.9 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense.
CarBucks
CarBucks provides specialty
floor plan inventory financing for more than 1,600 small automobile dealers in over 20 states. Credit lines are established for each
approved dealer using our Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are
vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of $8,700 per unit, generally
has an average 65-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.
CarBucks net income
increased $0.2 million to $1.3 million for the three months ended June 30, 2022 compared to $1.2 million for the same three-month period
in 2021. Net interest income increased $0.3 million to $4.4 million for the 2022 period from $4.2 million for the same period a year
ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased $0.3 million for the three
months ended June 30, 2022 compared to 2021 due to a contraction in the loan balance during the second quarter of 2022 as opposed to
an increase in the second quarter of 2021 and lower qualitative adjustments. This was partially offset by higher net charges during the
second quarter of 2022 as compared to the same period in 2021. Noninterest expense increased $0.3 million to $2.8 million for the 2022
period compared to $2.4 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense
in 2022.
Other
Other includes parent
company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other
activities not currently allocated to the aforementioned segments.
Other net income decreased
$0.7 million to a loss of $0.6 million for the three months ended June 30, 2022 compared to the same period in 2021 primarily due to
an increase in noninterest expense, specifically professional and advisory services expenses, partially offset by increased interest
income related to our taxable investments. Of professional and advisory expenses during the quarter, $0.9 million were related to our
pending merger with First Bancorp.
Comparison
of the Six Months Ended June 30, 2022 and June 30, 2021.
General
Net income
for the six months ended June 30, 2022 was $7.8 million, compared to $7.6 million for the same period in 2021. The increase in net income
for the period was primarily the result of increases in net interest income of $2.2 million, partially offset by an increase in noninterest
expenses totaling $1.9 million, $0.9 million of which is included in professional and advisory expenses and is related to our pending
merger with First Bancorp.
Net Interest Income
Net interest income
increased $2.2 million, or 9.27%, to $26.4 million for the six months ended June 30, 2022, compared to $24.2 million for the same period
in 2021. The increase in net interest income was primarily due to a higher volume in loans (both Core Bank and CarBucks), yields on taxable
investments and federal funds sold and other interest earning deposits, and decreases in the balance of and costs on time deposits. This
was partially offset by the decline in yields on loans (both Core Bank and CarBucks) and balances of money market accounts.
The following table
sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning
assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting
average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were
included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set
forth below include the effect of deferred fees and costs that are amortized or accreted to interest income or expense.
| |
For the Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Average
Outstanding
Balance | | |
Interest | | |
Yield/ Rate | | |
Average
Outstanding
Balance | | |
Interest | | |
Yield/ Rate | |
| |
(Dollars in thousands) | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans, Core Bank(1) | |
$ | 830,082 | | |
$ | 16,834 | | |
| 4.09 | % | |
$ | 812,361 | | |
$ | 16,922 | | |
| 4.20 | % |
Loans, Carbucks(2) | |
| 108,607 | | |
| 10,511 | | |
| 19.52 | % | |
| 85,029 | | |
| 9,125 | | |
| 21.64 | % |
Investments - taxable | |
| 110,106 | | |
| 999 | | |
| 1.83 | % | |
| 109,823 | | |
| 627 | | |
| 1.15 | % |
Investments - tax exempt(3) | |
| 11,689 | | |
| 175 | | |
| 3.02 | % | |
| 12,692 | | |
| 177 | | |
| 2.81 | % |
Federal funds sold and other interest earning deposits | |
| 135,427 | | |
| 258 | | |
| 0.38 | % | |
| 66,897 | | |
| 42 | | |
| 0.13 | % |
Other investments, at cost | |
| 2,755 | | |
| 29 | | |
| 2.12 | % | |
| 5,612 | | |
| 64 | | |
| 2.30 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-earning assets | |
| 1,198,666 | | |
| 28,806 | | |
| 4.85 | % | |
| 1,092,414 | | |
| 26,957 | | |
| 4.98 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-earning assets | |
| 35,576 | | |
| | | |
| | | |
| 37,258 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,234,242 | | |
| | | |
| | | |
$ | 1,129,672 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings accounts | |
$ | 16,628 | | |
$ | 8 | | |
| 0.10 | % | |
$ | 11,723 | | |
$ | 6 | | |
| 0.10 | % |
Time deposits | |
| 197,739 | | |
| 300 | | |
| 0.31 | % | |
| 261,826 | | |
| 791 | | |
| 0.61 | % |
Money market accounts | |
| 532,439 | | |
| 1,087 | | |
| 0.41 | % | |
| 413,736 | | |
| 915 | | |
| 0.45 | % |
Interest bearing transaction accounts | |
| 55,690 | | |
| 50 | | |
| 0.18 | % | |
| 65,702 | | |
| 84 | | |
| 0.26 | % |
Total interest bearing deposits | |
| 802,496 | | |
| 1,445 | | |
| 0.36 | % | |
| 752,987 | | |
| 1,796 | | |
| 0.48 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FHLB advances | |
| 5,000 | | |
| 10 | | |
| 0.40 | % | |
| 16,000 | | |
| 71 | | |
| 0.89 | % |
Junior subordinated debentures | |
| 35,891 | | |
| 883 | | |
| 4.96 | % | |
| 35,772 | | |
| 865 | | |
| 4.88 | % |
Other borrowings | |
| 1 | | |
| — | | |
| 0.00 | % | |
| — | | |
| — | | |
| 0.00 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-bearing liabilities | |
| 843,388 | | |
| 2,338 | | |
| 0.56 | % | |
| 804,759 | | |
| 2,732 | | |
| 0.68 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-bearing deposits | |
| 286,997 | | |
| | | |
| | | |
| 231,882 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other non interest bearing liabilities | |
| 5,853 | | |
| | | |
| | | |
| 5,845 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities | |
| 1,136,238 | | |
| | | |
| | | |
| 1,042,486 | | |
| | | |
| | |
Total equity | |
| 98,004 | | |
| | | |
| | | |
| 87,186 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities and equity | |
$ | 1,234,242 | | |
| | | |
| | | |
$ | 1,129,672 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tax-equivalent net interest income | |
| | | |
$ | 26,468 | | |
| | | |
| | | |
$ | 24,225 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest-earning assets(4) | |
$ | 355,278 | | |
| | | |
| | | |
$ | 287,655 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Average interest-earning assets to interest-bearing liabilities | |
| 142.13 | % | |
| | | |
| | | |
| 135.74 | % | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tax-equivalent net interest rate spread(5) | |
| | | |
| | | |
| 4.29 | % | |
| | | |
| | | |
| 4.30 | % |
Tax-equivalent net interest margin(6) | |
| | | |
| | | |
| 4.45 | % | |
| | | |
| | | |
| 4.47 | % |
(1) |
Core Bank is the bank’s primary business to provide
traditional deposit and lending products and services to commercial and retail banking clients. |
(2) |
Carbucks is the bank’s division that provides
specialty floor plan lending to small automobile dealers in over 20 states. |
(3) |
Tax exempt investments are calculated giving effect
to a 21% federal tax rate, or $37,000 and $37,000 for the six months ended June 30, 2022 and 2021, respectively. |
(4) |
Net interest-earning assets represents total interest-earning
assets less total interest-bearing liabilities. |
(5) |
Tax-equivalent net interest rate spread represents
the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(6) |
Tax-equivalent net interest margin represents
tax equivalent net interest income divided by average total interest-earning assets. |
The following
table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable
to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes
of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on
the absolute values of changes due to rate and the changes due to volume.
| |
For the Six Months Ended June 30, 2022 | |
| |
Compared to the Six Months Ended June 30, 2021 | |
| |
Increase (decrease) due to: | |
(In thousands) | |
Volume | | |
Rate | | |
Total | |
Interest-earning assets: | |
| | | |
| | | |
| | |
Loans - Core Bank (1) | |
$ | 365 | | |
$ | (453 | ) | |
$ | (88 | ) |
Loans - CarBucks (1) | |
| 2,347 | | |
| (961 | ) | |
| 1,386 | |
Investment - taxable | |
| 2 | | |
| 370 | | |
| 372 | |
Investments - tax exempt (2) | |
| (15 | ) | |
| 13 | | |
| (2 | ) |
Interest-earning deposits | |
| 72 | | |
| 144 | | |
| 216 | |
Other investments, at cost | |
| (30 | ) | |
| (5 | ) | |
| (35 | ) |
Total interest-earning assets | |
| 2,741 | | |
| (892 | ) | |
| 1,849 | |
| |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | |
Savings accounts | |
| 2 | | |
$ | — | | |
| 2 | |
Time deposits | |
| (162 | ) | |
| (329 | ) | |
| (491 | ) |
Money market accounts | |
| 246 | | |
| (75 | ) | |
| 171 | |
Interest bearing transaction accounts | |
| (12 | ) | |
| (22 | ) | |
| (34 | ) |
FHLB advances | |
| (34 | ) | |
| (27 | ) | |
| (61 | ) |
Junior subordinated debentures | |
| 3 | | |
| 16 | | |
| 19 | |
Other borrowings | |
| 1 | | |
| — | | |
| 1 | |
Total interest-bearing liabilities | |
| 44 | | |
| (437 | ) | |
| (393 | ) |
Change in tax-equivalent net interest income | |
$ | 2,697 | | |
$ | (455 | ) | |
$ | 2,242 | |
(1) |
Nonaccrual loans are included in the above analysis. |
(2) |
Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate. |
Net interest
income before provision for loan losses increased to $26.4 million for the six months ended June 30, 2022, compared to $24.2 million
for the same period in 2021, due to improvements in volume, partially offset by unfavorable movements in interest rates.
The increase
in tax-equivalent net interest income of $2.7 million related to volume was primarily the result of higher average loan (both Core Bank
and CarBucks) which increased $41.3 million, and a $64.1 million decrease in average time deposits for the six months ended June 30,
2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases
of $118.7 million in money market balances.
The decrease
in tax-equivalent net interest income of $0.5 million related to rate was primarily the result of decreased yields on Core Bank and CarBucks
loans and decreased costs on time deposits, partially offset by increased yields on investments and interest-earning deposits.
Our tax-equivalent
net interest margin was 4.45% for the six months ended June 30, 2022, compared to 4.47% for the same period in 2021, a decrease of two
basis points. The decrease in net interest margin was primarily attributable to reduced yields on our Core Bank and CarBucks loans, partially
offset by higher average loan balances combined with interest rate reductions on our cost of funds.
Provision for Loan
Losses
We recorded a provision
for loan losses for the six months ended June 30, 2022 of $0.4 million due to organic loan growth and certain qualitative adjustments.
This compares to a $0.6 million provision for loan losses in for the same period in 2021. We are experiencing continued stabilization
in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light
of ongoing supply chain disruptions, labor shortages and the associated impact on monetary policy, there is a risk that loss rates could
increase.
Noninterest Income
The following table
summarizes the components of noninterest income and the corresponding changes between the six months ended June 30, 2022 and 2021 (in
thousands):
| |
Six Months Ended June 30, | | |
| |
| |
2022 | | |
2021 | | |
Change | |
Service charges on deposit accounts | |
$ | 702 | | |
$ | 590 | | |
$ | 112 | |
Bank owned life insurance | |
| 157 | | |
| 177 | | |
| (20 | ) |
Net gain on sale of premises and equipment | |
| 36 | | |
| 84 | | |
| (48 | ) |
Other noninterest income | |
| 368 | | |
| 492 | | |
| (124 | ) |
Total noninterest income | |
$ | 1,263 | | |
$ | 1,343 | | |
$ | (80 | ) |
Our noninterest
income decreased less than $0.1 million to $1.3 million in the six months ended June 30, 2022, compared to the same period in 2021, due
primarily to decreases in net gain on sale of premises and equipment and other noninterest income, partially offset by an increase in
service charges on deposit accounts.
Noninterest Expense
The following table summarizes the components
of noninterest expense and the corresponding change between the six months ended June 30, 2022 and 2021 (in thousands):
| |
Six Months Ended June 30, | | |
| |
| |
2022 | | |
2021 | | |
Change | |
Compensation and employee benefits | |
$ | 11,216 | | |
$ | 10,061 | | |
$ | 1,155 | |
Net occupancy | |
| 1,157 | | |
| 1,148 | | |
| 9 | |
Federal deposit insurance | |
| 218 | | |
| 325 | | |
| (107 | ) |
Professional and advisory | |
| 1,407 | | |
| 574 | | |
| 833 | |
Data processing | |
| 1,014 | | |
| 1,027 | | |
| (13 | ) |
Marketing and advertising | |
| 111 | | |
| 79 | | |
| 32 | |
Net cost of operation of real estate owned | |
| 37 | | |
| 129 | | |
| (92 | ) |
Other noninterest expense | |
| 1,852 | | |
| 1,727 | | |
| 125 | |
Total noninterest expenses | |
$ | 17,012 | | |
$ | 15,070 | | |
$ | 1,942 | |
Our noninterest expense
increased $1.9 million to $17.0 million in the six months ended June 30, 2022, compared to the same period in 2021, primarily as the
result of increases in compensation and employee benefits of $1.2 million and increases in professional and advisory expenses of $0.8
million. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined
with annual raises and increases in employee benefits, incentives and commissions. The increase in professional and advisory expenses
is primarily related to our pending merger with First Bancorp.
Income Taxes
Income tax expense
totaled $2.5 million for the six months ended June 30, 2022, compared to $2.4 million for the same period in 2021. Income tax expense
benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.9% and
23.7% for the six months ended June 30, 2022 and 2021, respectively.
We continue to have
unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.
Discussion of Segment Results
Year-to Date through June 30, 2022
See Note 9,
“Reportable Segments” in notes to the consolidated financial statements included under Item 1 -“Financial Statements”
for additional disclosures related to our reportable business segments. Fluctuations in noninterest income and noninterest expense incurred
directly by the segments are more fully discussed in the “Noninterest income” and “Noninterest expense” sections
above.
Comparison
of the Six Months Ended June 30, 2022 and 2021.
| |
As of and for the Six Months Ended June 30, 2022 | |
| |
Core Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest income | |
$ | 17,118 | | |
$ | 10,511 | | |
$ | 1,140 | | |
$ | 28,769 | |
Interest expense | |
| 210 | | |
| 1,245 | | |
| 883 | | |
| 2,338 | |
Net interest income | |
| 16,908 | | |
| 9,266 | | |
| 257 | | |
| 26,431 | |
Provision for loan losses | |
| (167 | ) | |
| 594 | | |
| — | | |
| 427 | |
Noninterest income | |
| 985 | | |
| 121 | | |
| 157 | | |
| 1,263 | |
Noninterest expense | |
| 10,615 | | |
| 5,465 | | |
| 932 | | |
| 17,012 | |
Net income before taxes | |
| 7,445 | | |
| 3,328 | | |
| (518 | ) | |
| 10,255 | |
Income tax expense | |
| 1,782 | | |
| 796 | | |
| (124 | ) | |
| 2,454 | |
Net income | |
$ | 5,663 | | |
$ | 2,532 | | |
$ | (394 | ) | |
$ | 7,801 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,010,324 | | |
$ | 106,307 | | |
$ | 137,401 | | |
$ | 1,254,032 | |
| |
| |
| |
As of and for the Six Months Ended June 30, 2021 | |
| |
Core Bank | | |
CarBucks | | |
Other | | |
Total | |
Interest income | |
$ | 17,026 | | |
$ | 9,125 | | |
$ | 769 | | |
$ | 26,920 | |
Interest expense | |
| 1,162 | | |
| 705 | | |
| 865 | | |
| 2,732 | |
Net interest income | |
| 15,864 | | |
| 8,420 | | |
| (96 | ) | |
| 24,188 | |
Provision for loan losses | |
| 591 | | |
| (40 | ) | |
| — | | |
| 551 | |
Noninterest income | |
| 1,024 | | |
| 75 | | |
| 244 | | |
| 1,343 | |
Noninterest expense | |
| 10,158 | | |
| 4,875 | | |
| 37 | | |
| 15,070 | |
Net income before taxes | |
| 6,139 | | |
| 3,660 | | |
| 111 | | |
| 9,910 | |
Income tax expense | |
| 1,457 | | |
| 869 | | |
| 27 | | |
| 2,353 | |
Net income | |
$ | 4,682 | | |
$ | 2,791 | | |
$ | 84 | | |
$ | 7,557 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 930,199 | | |
$ | 86,833 | | |
$ | 146,439 | | |
$ | 1,163,471 | |
Core Bank
Core Bank consists
of commercial and consumer lending and full-service branches in its geographic region with its own management team. The branches provide
a full range of traditional banking products as well as treasury services and merchant services.
Core Bank net income
increased $0.3 million to $5.0 million for the six months ended June 30, 2022 compared to $4.7 million for the same period in 2021. Net
interest income increased $1.0 million to $16.9 million for the six months ended June 30, 2022 from $15.9 million for the same period
a year ago primarily due to increased loan volume and reduced funding costs, partially offset by a reduction in loan yield. Provision
for loan losses decreased $0.8 million for the six months ended June 30, 2022 compared to 2021 due to lower loan growth and qualitative
adjustments to the allowance for loan losses along with higher net recovery activity in the six months ended June 30, 2022 as compared
to the same period in 2021. Noninterest expense increased $1.4 million to $11.5 million for the 2022 period compared to $10.2 million
for the same period in 2021 due primarily to an increase in compensation and employee benefits expense and professional and advisory
expenses in 2022. Of professional and advisory expenses through June 30, 2022, $0.9 million were related to our pending merger with First
Bancorp.
CarBucks
CarBucks provides specialty
floor plan inventory financing for more than 1,600 small automobile dealers in over 20 states. Credit lines are established for each
approved dealer using our Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are
vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of $8,300 per unit, generally
has an average 66-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.
CarBucks net income
decreased $0.3 million to $2.5 million for the six months ended June 30, 2022 compared to $2.8 million for the same six-month period
in 2021. Net interest income increased $0.8 million to $9.3 million for the six months ended June 30, 2022 compared to $8.4 million for
the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses increased $0.6
million for the six months ended June 30, 2022 compared to the same period in 2021 due to increased net charge offs and higher loan balance,
partially offset by lower qualitative adjustments. Noninterest expense increased $0.6 million to $5.5 million for the six months ended
June 30, 2022 compared to $4.9 million for the same period in 2021 due primarily to increases in compensation and employee benefits expense
and other noninterest expense in 2022.
Other
Other includes parent
company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other
activities not currently allocated to the aforementioned segments.
Other net income increased
$0.2 million to $0.3 million for the six months ended June 30, 2022 compared to the same period in 2021 primarily due to increased interest
income related to our taxable investments and federal funds sold and other interest earning deposits.
Liquidity
and Capital Resources
Liquidity
and Market Risk. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank
of Atlanta (“FHLB”), and the sale of available-for-sale securities. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. Our ALCO, under the direction of our Chief Financial Officer, is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and
deposit withdrawals of our customers as well as unanticipated contingencies. We have not experienced any unusual pressure on our deposit
balances or our liquidity position as a result of the COVID-19 pandemic. We believe that, as of
June 30, 2022, we have enough sources of liquidity to satisfy our liquidity needs for the next twelve months and thereafter.
We regularly
monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing
maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program.
Excess liquid assets are invested generally in FHLB and Federal Reserve Bank of Richmond (“FRB”) interest-earning deposits
and investment securities and are also used to pay off short-term borrowings. At June 30, 2022, cash and cash equivalents totaled $142.9
million. Included in this total was $100.0 million held at the FRB, $1.2 million held at the FHLB, and $34.9 million held at correspondent
banks in interest-earning accounts.
Our cash flows
are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash
flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources
and uses of liquidity during the six months ended June 30, 2022 and 2021 (in thousands):
| |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
Investing activities: | |
| | | |
| | |
Purchases of investments | |
$ | (27,225 | ) | |
$ | (37,013 | ) |
Maturities and principal repayments of investments | |
| 5,756 | | |
| 14,565 | |
Net increase in loans | |
| (19,602 | ) | |
| (30,489 | ) |
| |
| | | |
| | |
Financing activities: | |
| | | |
| | |
Net increase in deposits | |
$ | 52,060 | | |
$ | 69,902 | |
Repurchase of common stock | |
| — | | |
| (3,946 | ) |
In addition, because
the Company is a separate entity from the Bank, it must provide for its own liquidity. The Company is responsible for payment of dividends
declared on its common and preferred stock and interest and principal on any outstanding debt or trust preferred securities. The Company
currently has internal capital resources to meet these obligations. While the Company has access to capital, the ultimate sources of
its liquidity are dividends from the Bank and tax allocation agreements, which are limited by applicable law and regulations. The Bank
paid no dividends to the Company in the six months ended June 30, 2022 or 2021.
At June 30, 2022, we
had $330.1 million in outstanding commitments to extend credit through unused lines of credit and stand-by letters of credit.
Depending on market
conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit.
Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large
portion of our retail certificates of deposit with maturities of one year or less as June 30, 2022.
In addition to loans,
we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities
portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow
borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers
to prepay higher-rate loans, producing higher than otherwise scheduled cash flows.
Liquidity management is both a daily
and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with
the FHLB. The following summarizes our borrowing capacity as of June 30, 2022 (in thousands):
| |
Total | | |
Used | | |
Unused | |
| |
Capacity | | |
Capacity | | |
Capacity | |
FHLB | |
| | | |
| | | |
| | |
Loan collateral capacity | |
$ | 370,879 | | |
| | | |
| | |
Pledgeable marketable securities | |
| 121,627 | | |
| | | |
| | |
FHLB totals | |
| 492,506 | | |
$ | 5,000 | | |
$ | 487,506 | |
Fed funds lines | |
| 49,000 | | |
| — | | |
| 49,000 | |
| |
$ | 541,506 | | |
$ | 5,000 | | |
$ | 536,506 | |
Capital Resources.
Shareholders’ equity decreased $1.3 million to $96.1 million at June 30, 2022 compared to $97.4 million at December 31, 2021.
This decrease was primarily attributable to after-tax decreases in market value of AFS investment securities of $8.5 million and dividends
declared of $1.4 million offset by net income of $7.8 million, stock-based compensation of $0.3 million, and stock options exercised
of $0.6 million
The tables below
summarize the capital amounts and ratios of the Bank and the minimum regulatory requirements in accordance with Basel III and the prompt
corrective action provisions at June 30, 2022 and December 31, 2021 (dollars in thousands).
| |
Actual | | |
For Capital Adequacy
Purposes (1) | | |
To Be Well-Capitalized
Under Prompt
Corrective Action
Provisions | |
| |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
As of June 30, 2022: | |
| | |
| | |
| | |
| | |
| | |
| |
Tier 1 Leverage Capital | |
$ | 131,873 | | |
| 10.53 | % | |
$ | 50,072 | | |
| >4.0% | | |
$ | 62,589 | | |
| >5.0% | |
Common Equity Tier 1 Capital | |
$ | 131,873 | | |
| 12.75 | % | |
$ | 72,406 | | |
| >7.0% | | |
$ | 67,234 | | |
| >6.5% | |
Tier 1 Risk-based Capital | |
$ | 131,873 | | |
| 12.75 | % | |
$ | 87,921 | | |
| >8.5% | | |
$ | 82,749 | | |
| >8.0% | |
Total Risk-based Capital | |
$ | 144,817 | | |
| 14.00 | % | |
$ | 108,609 | | |
| >10.5% | | |
$ | 103,437 | | |
| >10.0% | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As of December 31, 2021: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tier 1 Leverage Capital | |
$ | 123,344 | | |
| 10.21 | % | |
$ | 48,317 | | |
| >4.0% | | |
$ | 60,396 | | |
| >5.0% | |
Common Equity Tier 1 Capital | |
$ | 123,344 | | |
| 12.24 | % | |
$ | 70,517 | | |
| >7.0% | | |
$ | 65,480 | | |
| >6.5% | |
Tier 1 Risk-based Capital | |
$ | 123,344 | | |
| 12.24 | % | |
$ | 85,628 | | |
| >8.5% | | |
$ | 80,591 | | |
| >8.0% | |
Total Risk-based Capital | |
$ | 135,951 | | |
| 13.50 | % | |
$ | 105,776 | | |
| >10.5% | | |
$ | 100,739 | | |
| >10.0% | |
| (1) | Includes
capital conservation buffer of 2.50%. |
The tables below
summarize the capital amounts and ratios of the Company and the minimum(1) regulatory requirements in accordance with Basel
III at June 30, 2022, and December 31, 2021 (in thousands).
| |
Actual | | |
For Capital Adequacy
Purposes (2) | |
| |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
As of June 30, 2022: | |
| | |
| | |
| | |
| |
Tier I Leverage Capital | |
$ | 110,960 | | |
| 8.86 | % | |
$ | 50,085 | | |
| >4.0% | |
Common Equity Tier 1 Capital | |
$ | 102,713 | | |
| 9.92 | % | |
$ | 72,470 | | |
| >7.0% | |
Tier I Risk-based Capital | |
$ | 110,960 | | |
| 10.72 | % | |
$ | 88,000 | | |
| >8.5% | |
Total Risk Based Capital | |
$ | 151,592 | | |
| 14.64 | % | |
$ | 108,706 | | |
| >10.5% | |
| |
| | | |
| | | |
| | | |
| | |
As of December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Tier I Leverage Capital | |
$ | 103,730 | | |
| 8.59 | % | |
$ | 48,327 | | |
| >4.0% | |
Common Equity Tier 1 Capital | |
$ | 95,482 | | |
| 9.47 | % | |
$ | 70,574 | | |
| >7.0% | |
Tier I Risk-based Capital | |
$ | 103,730 | | |
| 10.29 | % | |
$ | 85,696 | | |
| >8.5% | |
Total Risk Based Capital | |
$ | 143,963 | | |
| 14.28 | % | |
$ | 105,860 | | |
| >10.5% | |
| (1) | Under
the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not
subject to the minimum capital adequacy and capital conservation buffer capital requirements
at the holding company level, unless otherwise advised by the FRB (such capital requirements
are applicable only at the Bank level). Although the minimum regulatory capital requirements
are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes. |
| (2) | Includes
capital conservation buffer of 2.50%. |