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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

__________________________

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2022

Or

oTransition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to _____

 

Commission File Number: 000-31937

GrandSouth Bancorporation

(Exact name of registrant as specified in its charter)

   
South Carolina 57-1104394
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
381 Halton Road,  
Greenville, South Carolina 29607
(Address of principal executive offices) (Zip Code)
   

(864) 770-1000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class Trading symbol(s) Name of each exchange on which registered
None None None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

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

 

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

 

Large accelerated filer o   Accelerated filer o   Non-accelerated filer x   Smaller reporting company x   Emerging growth company o

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On November 1, 2022, 5,225,642 shares of the issuer’s common stock, no par value, were issued and outstanding.

 

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

 

FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION Page No.
   
Item 1. Financial Statements (Unaudited)  3
  Consolidated Balance Sheets – September 30, 2022 and December 31, 2021  3
  Consolidated Statements of Income – Three and Nine Months Ended September 30, 2022 and 2021  4
  Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2022 and 2021  5
  Consolidated Statements of Changes in Shareholders’ Equity – Three and Nine Months Ended September 30, 2022 and 2021  6
  Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2022 and 2021  7
  Notes to Consolidated Financial Statements  8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  29
Item 3. Quantitative and Qualitative Disclosures About Market Risk  50
Item 4. Controls and Procedures  50
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings  51
Item 1A. Risk Factors  51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  53
Item 3. Defaults Upon Senior Securities  53
Item 4. Mine Safety Disclosures  53
Item 5. Other Information  53
Item 6. Exhibits  54
  Signatures  55

2 

 

Item 1. Financial Statements

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

 

   (Unaudited)   (Audited) 
(in thousands, except share data)  September 30,
2022
   December 31,
2021
 
Assets        
         
Cash and due from banks  $2,559   $2,522 
Interest-earning deposits   102,986    120,602 
Federal funds sold   2,670    977 
Cash and cash equivalents   108,215    124,101 
           
Investments - available for sale   108,261    111,962 
Investments - held to maturity   5,991     
Other investments, at cost   1,911    2,984 
Loans receivable, net of deferred fees and costs   995,061    933,475 
Allowance for loan losses   (14,579)   (13,723)
Premises and equipment, net   17,614    17,783 
Real estate owned   732    842 
Accrued interest receivable   5,335    4,808 
Bank owned life insurance   15,014    14,778 
Net deferred tax asset   6,381    2,968 
Goodwill   737    737 
Other assets   3,294    3,007 
Total assets  $1,253,967   $1,203,722 
           
Liabilities and Shareholders’ Equity          
           
Liabilities:          
Deposits:          
Noninterest-bearing  $319,193   $280,665 
Interest-bearing   790,814    778,376 
Total deposits   1,110,007    1,059,041 
Federal Home Loan Bank advances   5,000    5,000 
Junior subordinated notes   35,955    35,864 
Accrued interest payable   653    383 
Accrued expenses and other liabilities   5,855    6,029 
Total liabilities   1,157,470    1,106,317 
           
Commitments and contingencies (Note 6)          
           
Shareholders’ Equity:          
Preferred stock - Series A - no par value; 287,895 shares authorized, 282,828 shares issued, and outstanding as of September 30, 2022 and December 31, 2021        
Common stock -  no par value; 20,000,000 shares authorized; 5,225,042 and 5,168,681 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively        
Additional paid in capital   45,825    44,570 
Retained earnings   61,727    51,649 
Accumulated other comprehensive income   (11,055)   1,186 
Total shareholders’ equity   96,497    97,405 
Total liabilities and shareholders’ equity  $1,253,967   $1,203,722 

The accompanying notes are an integral part of the consolidated financial statements.

 

3 

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands, except per share data)  2022   2021   2022   2021 
Interest income:                
Interest and fees on loans  $15,175   $13,502   $42,521   $39,549 
Taxable securities   631    389    1,630    1,015 
Tax-exempt securities   69    69    207    209 
Interest-earning deposits   654    27    911    69 
Other   19    23    48    88 
Total interest income   16,548    14,010    45,317    40,930 
Interest expense:                    
Deposits   1,361    756    2,806    2,552 
Federal Home Loan Bank advances   5    36    15    107 
Junior subordinated notes   477    431    1,360    1,296 
Total interest expense   1,843    1,223    4,181    3,955 
Net interest income   14,705    12,787    41,136    36,975 
Provision for loan losses   1,060    494    1,487    1,045 
Net interest income after provision for loan losses   13,645    12,293    39,649    35,930 
Noninterest income:                    
Service charges on deposit accounts   380    320    1,082    910 
Investment securities loss   (27)       (27)    
Bank owned life insurance   80    84    236    261 
Net gain on sale of premises and equipment   30    6    66    90 
Other   207    248    576    740 
Total noninterest income   670    658    1,933    2,001 
Noninterest expenses:                    
Compensation and employee benefits   5,771    5,367    16,987    15,428 
Net occupancy   574    584    1,730    1,732 
Federal deposit insurance   128    157    345    482 
Professional and advisory   174    314    686    888 
Merger expenses   143        1,039     
Data processing   579    509    1,593    1,536 
Marketing and advertising   45    49    157    128 
Net cost of operation of real estate owned   1    11    38    140 
Other   1,060    916    2,912    2,643 
Total noninterest expenses   8,475    7,907    25,487    22,977 
Income before taxes   5,840    5,044    16,095    14,954 
Income tax expense   1,421    1,210    3,875    3,563 
Net income   4,419    3,834    12,220    11,391 
Preferred stock dividends   (39)   (30)   (116)   (90)
Net income applicable to common shareholders  $4,380   $3,804   $12,104   $11,301 
Earnings per common share:                    
Basic  $0.80   $0.71   $2.22   $2.09 
Diluted  $0.77   $0.68   $2.14   $2.04 
Weighted average common shares outstanding:                    
Basic   5,219,863    5,141,214    5,201,524    5,158,816 
Diluted   5,454,164    5,292,142    5,409,966    5,270,138 

The accompanying notes are an integral part of the consolidated financial statements.

 

4 

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2022   2021   2022   2021 
Net income  $4,419   $3,834   $12,220   $11,391 
Other comprehensive income (loss):                    
Change in unrealized holding losses on securities available for sale   (4,792)   (526)   (15,680)   (1,427)
Reclassification adjustment for securities losses realized in net income   27        27     
Other comprehensive loss, before tax   (4,765)   (526)   (15,653)   (1,427)
Income tax effect related to items of other comprehensive income (loss)   1,039    114    3,412    310 
Total other comprehensive loss, after tax   (3,726)   (412)   (12,241)   (1,117)
Comprehensive income (loss)  $693   $3,422   $(21)  $10,274 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5 

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

 
                               Additional       Accumulated
Other
     
   Common Stock    Preferred Stock    Paid in   Retained   Comprehensive     
(in thousands, except share and per share data)  Shares    Amount   Shares   Amount   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 
                                         
Net income                       4,419        4,419 
Other comprehensive loss, net of tax                           (3,726)   (3,726)
Stock compensation expense                   138            138 
Stock options exercised   15,500                263            263 
Common stock dividend ($0.13 per share)                       (679)       (679)
Preferred stock dividend ($0.1365 per share)                       (39)       (39)
Balances at September 30, 2022   5,225,042   $    282,828   $   $45,825   $61,727   $(11,055)  $96,497 
                                         
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 
                                         
Net income                       3,834        3,834 
Other comprehensive income, net of tax                           (412)   (412)
Stock compensation expense                   146            146 
Stock options exercised   21,000                294            294 
Stock repurchase           (4,608)       (86)           (86)
Common stock dividend ($0.10 per share)                       (514)       (514)
Preferred stock dividend ($0.105 per share)                       (30)       (30)
Balances at September 30, 2021   5,148,681   $    283,287   $   $44,206   $47,471   $1,042   $92,719 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6 

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

 

   For the Nine Months Ended
September 30,
 
(in thousands)  2022   2021 
Cash flows from operating activities:          
Net income  $12,220   $11,391 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   1,049    754 
Investment amortization, net   583    903 
Provision for loan losses   1,487    1,045 
Provision for real estate owned       113 
Stock-based compensation expense   412    454 
(Increase) decrease in deferred tax asset   (1)    
(Gain) loss on sale of investment securities available for sale   27     
Income on bank owned life insurance, net   (236)   (261)
Gain on sale of fixed assets   (66)   (90)
Net realized gain on sale of real estate owned   (5)   (33)
Net change in operating assets and liabilities:          
Accrued interest receivable   (527)   (118)
Other assets   (287)   (2,120)
Accrued interest payable   270    293 
Other liabilities   (174)   1,054 
Net cash provided by operating activities   14,752    13,385 
Cash flows from investing activities:          
Activity for investment securities available for sale:          
Purchases   (27,232)   (38,520)
Maturities/calls and principal repayments   8,179    19,645 
Net increase in loans   (62,508)   (58,436)
Proceeds from sale of real estate owned   115     
Redemption of BOLI policies       429 
Proceeds from sale of fixed assets   80    113 
Purchase of fixed assets   (512)   (1,511)
Proceeds from sale of other real estate owned       457 
Purchase of other investments, at cost   (177)    
Redemption of other investments, at cost   1,750    2,776 
Net cash used in investing activities   (80,305)   (75,047)
Cash flows from financing activities:          
Net increase in deposits   50,966    105,257 
Repurchase of common stock       (3,946)
Repurchase of preferred stock       (86)
Cash received upon exercise of stock options   843    1,139 
Dividends paid on common stock   (2,026)   (1,551)
Dividends paid on preferred stock   (116)   (90)
Net cash provided by financing activities   49,667    100,723 
Net change in cash and cash equivalents   (15,886)   39,061 
Cash and cash equivalents, beginning of period   124,101    63,025 
Cash and cash equivalents, end of period  $108,215   $102,086 
           
Supplemental disclosures of cash flow information:          
Cash paid during the year for:          
Interest on deposits and other borrowings  $1,491   $3,562 
Income taxes   4,257    4,532 

The accompanying notes are an integral part of the consolidated financial statements.

 

7 

 

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 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.

 

8 

 

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 March 2022, the FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. ASU 2022-02 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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.

9 

 

NOTE 2. INVESTMENTS

 

 

The amortized cost and estimated fair values of available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities as of September 30, 2022 and December 31, 2021 are summarized as follows (in thousands):

   September 30, 2022 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Available for sale                    
U.S. government agencies  $27,454   $   $(2,227)  $25,227 
State and municipal obligations   24,862        (4,700)   20,162 
Mortgage-backed securities - agency   28,938    125    (3,470)   25,593 
Collateralized mortgage obligations - agency   23,537        (1,755)   21,782 
Asset-backed securities   2,159        (60)   2,099 
Corporate bonds   15,450        (2,052)   13,398 
Total  $122,400   $125   $(14,264)  $108,261 
                     
Held to maturity                    
U.S. government agencies  $5,991   $   $(192)  $5,799 
Total  $5,991   $   $(192)  $5,799 
     
   December 31, 2021 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Available for sale                    
U.S. government agencies  $9,479   $   $(40)  $9,439 
State and municipal obligations  $26,011   $959   $(293)  $26,677 
Mortgage-backed securities - agency   33,191    316    (89)   33,418 
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.

10 

 

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):

 

   September 30, 2022 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Available for sale                              
U.S. government agencies  $23,508   $1,945   $1,719   $282   $25,227   $2,227 
State and municipal obligations   17,557    3,502    2,605    1,198    20,162    4,700 
Mortgage-backed securities - agency   16,600    2,482    4,645    988    21,245    3,470 
Collateralized mortgage obligations - agency   16,017    1,565    5,764    190    21,781    1,755 
Asset-backed securities           2,099    60    2,099    60 
Corporate bonds   10,810    1,640    2,588    412    13,398    2,052 
Total  $84,492   $11,134   $19,420   $3,130   $103,912   $14,264 
Held to maturity                              
U.S. government agencies  $5,799   $192   $   $   $5,799   $192 
Total  $5,799   $192   $   $   $5,799   $192 
     
   December 31, 2021 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Available for sale                              
U.S. government agencies  $9,439   $40   $   $   $9,439   $40 
State and municipal obligations   8,083    293            8,083    293 
Mortgage-backed securities - agency   18,346    89            18,346    89 
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:

   September 30, 2022 
   Less Than
12 Months
   More Than
12 Months
   Total 
Available for sale               
U.S. government agencies   7    1    8 
State and municipal obligations   22    3    25 
Mortgage-backed securities - agency   16    2    18 
Collateralized mortgage obligations - agency   10    4    14 
Asset-backed securities       2    2 
Corporate bonds   26    8    34 
Total   81    20    101 
Held to maturity               
U.S. government agencies   2        2 
Total   2        2 
   December 31, 2021 
   Less Than
12 Months
   More Than
12 Months
   Total 
Available for sale               
U.S. government agencies   3        3 
State and municipal obligations   8        8 
Mortgage-backed securities - agency   7        7 
Collateralized mortgage obligations - agency   5        5 
Asset-backed securities       2    2 
Corporate bonds   10        10 
Total   33    2    35 

11 

 

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 nine months ended September 30, 2022 or 2021.

 

The amortized cost and estimated fair value of AFS investments in debt securities at September 30, 2022, by contractual maturity, are shown below (in thousands).

 

 

   Available for sale   Held to maturity 
   Amortized
Cost
   Fair Value   Amortized
Cost
   Fair Value 
Over 1 year through 5 years  $17,973   $17,058   $5,991   $5,799 
Over 5 years through 10 years   30,523    26,031         
Over 10 years   19,270    15,698         
Total securites other than asset-backed and mortgage-backed securities   67,766    58,787    5,991    5,799 
                     
Mortgage-backed securities   28,938    25,593         
Collaterized mortgage obigations   23,537    21,782         
Asset-backed securities   2,159    2,099         
Total  $122,400   $108,261   $5,991   $5,799 

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 September 30, 2022 and December 31, 2021. There were no HTM securities pledged against deposits and borrowings at September 30, 2022 and December 31, 2021.

 

Other investments are comprised of the following and are recorded at cost which approximates fair value (in thousands):

 

   September 30,
2022
   December 31,
2021
 
Federal Home Loan Bank stock  $790   $733 
Investment in Trust Preferred Securities   247    247 
Certificates of deposit   254    1,504 
Other investments   620    500 
Total other investments, at cost  $1,911   $2,984 

 

Certificates of deposit totaling zero and $1.3 million were pledged against customer deposits at September 30, 2022 and December 31, 2021, respectively. Federal Home Loan Bank of Atlanta (“FHLB”) stock is used to collateralize advances with the FHLB.

12 

 

NOTE 3. LOANS RECEIVABLE

 

 

Loans receivable are summarized in the table below as of the dates indicated (in thousands):

 

 

   September 30,   December 31, 
   2022   2021 
Real estate loans:        
One-to four-family residential  $145,107   $132,836 
Commercial real estate   444,003    423,552 
Home equity loans and lines of credit   21,970    21,568 
Residential construction   37,927    38,881 
Other construction and land   84,401    75,682 
Total real estate loans   733,408    692,519 
Commercial and industrial   255,817    234,355 
Consumer   6,504    7,129 
Total commercial and consumer   262,321    241,484 
Loans receivable, gross   995,729    934,003 
Net deferred loan fees   (668)   (528)
Loans receivable, net of deferred fees  $995,061   $933,475 

 

Commercial loans includes PPP loans with recorded investments of zero and $1.3 million as of September 30, 2022 and December 31, 2021, respectively.

 

The Bank had $65.1 million and $46.6 million of loans pledged as collateral to secure funding with the FHLB at September 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):

 

   Three Months Ended September 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  $1,431   $4,588   $243   $401   $878   $6,393   $166   $14,100 
Provision   25    269    5    13    18    735    (5)   1,060 
Charge-offs                       (646)       (646)
Recoveries   1                    64        65 
Ending balance  $1,457   $4,857   $248   $414   $896   $6,546   $161   $14,579 
     
   Three Months Ended September 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  $1,227   $4,714   $226   $372   $777   $5,750   $259   $13,325 
Provision   130    267    10    21    29    46    (9)   494 
Charge-offs   (1)   (52)               (100)       (153)
Recoveries   2                    62        64 
Ending balance  $1,358   $4,929   $236   $393   $806   $5,758   $250   $13,730 

13 

 
   Nine Months Ended September 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   (15)   116    2    (16)   53    1,363    (16)   1,487 
Charge-offs                       (1,176)   (10)   (1,186)
Recoveries   109    53            19    374        555 
Ending balance  $1,457   $4,857   $248   $414   $896   $6,546   $161   $14,579 
     
   Nine Months Ended September 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   70    422    5    4    (54)   483    115    1,045 
Charge-offs   (30)   (52)               (304)       (386)
Recoveries   21                17    461        499 
Ending balance  $1,358   $4,929   $236   $393   $806   $5,758   $250   $13,730 

 

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):

 

   September 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  $16   $6   $   $   $   $   $   $22 
Collectively evaluated for impairment   1,441    4,851    248    414    896    6,546    161    14,557 
Ending Balance  $1,457   $4,857   $248   $414   $896   $6,546   $161   $14,579 
                                         
Loans receivable                                        
Individually evaluated for impairment  $913   $1,784   $   $   $   $   $   $2,697 
Collectively evaluated for impairment   143,911    441,458    22,003    37,800    84,122    256,468    6,602    992,364 
Loans and Leases Receivable, Gross  $144,824   $443,242   $22,003   $37,800   $84,122   $256,468   $6,602   $995,061 
                                         
   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 

14 

 

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.

15 

 

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 September 30, 2022.

16 

 

The recorded investment in loans by portfolio segment and loan grade is presented in the following tables as of the dates indicated (in thousands):

 

    September 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   $   $   $   $   $   $319   $159   $478 
2        226                        226 
3    6,268    33,700    3,415        1,574    8,989    27    53,973 
4    116,654    328,508    16,287    29,607    67,818    103,036    5,427    667,337 
5    19,557    78,085    2,050    8,193    14,730    142,842    953    266,410 
6    1,663    928    251            877    14    3,733 
7    682    1,795                405    22    2,904 
Total   $144,824   $443,242   $22,003   $37,800   $84,122   $256,468   $6,602   $995,061 
                                          
    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

   September 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   $144,785   $144,824 
Commercial real estate                   443,242    443,242 
Home equity and lines of credit                   22,003    22,003 
Residential construction                   37,800    37,800 
Other construction and land                   84,122    84,122 
Commercial       15        15    256,453    256,468 
Consumer                   6,602    6,602 
Total  $   $15   $39   $54   $995,007   $995,061 
     
   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 

17 

 

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 September 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 September 30, 2022 and December 31, 2021 (in thousands).

 

   September 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  $575   $575   $   $387   $387   $ 
Commercial real estate   982    982        2,080    2,132     
Commercial               28    28     
    1,557    1,557        2,495    2,547     
                               
Loans with a valuation allowance                              
One-to-four family residential   339    339    16    348    348    20 
Commercial real estate   801    801    6             
    1,140    1,140    22    348    348    20 
                               
Total                              
One-to-four family residential   914    914    16    735    735    20 
Commercial real estate   1,783    1,783    6    2,080    2,132     
Commercial               28    28     
   $2,697   $2,697   $22   $2,843   $2,895   $20 

18 

 

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 September 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  $574   $8   $391   $3 
Commercial real estate   996    13    2,202    19 
Commercial           33     
    1,570    21    2,626    22 
                     
Loans with a valuation allowance                    
One-to-four family residential   339    3    352    3 
Commercial real estate   813    14         
    1,152    17    352    3 
                     
Total                    
One-to-four family residential   913    11    743    6 
Commercial real estate   1,809    27    2,202    19 
Commercial           33     
   $2,722   $38   $2,978   $25 
     
   Nine Months Ended September 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  $576   $21   $394   $9 
Commercial real estate   1,025    38    2,243    59 
Other construction and land           35     
    1,601    59    2,672    68 
                     
Loans with a valuation allowance                    
One-to-four family residential   343    9    355    9 
Commercial real estate   833    36         
    1,176    45    355    9 
                     
Total                    
One-to-four family residential   919    30    749    18 
Commercial real estate   1,858    74    2,243    59 
Other construction and land           35     
   $2,777   $104   $3,027   $77 

19 

 

Nonperforming Loans

 

The recorded investment of nonperforming loans by portfolio segment is presented in the table below as of the dates indicated (in thousands):

   September 30,
2022
   December 31,
2021
 
One-to-four family residential  $61   $107 
Commercial real estate   291    767 
Commercial   335    473 
Consumer       2 
Nonperforming loans  $687   $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):

 

   September 30, 2022 
   Performing   Nonperforming   Total 
   TDRs   TDRs   TDRs 
One-to-four family residential  $555   $   $555 
Commercial real estate   889        889 
Commercial   197    96    293 
Consumer   9        9 
Total  $1,650   $96   $1,746 
     
   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 September 30, 2022.

 

     Modification Type  Number of TDR
Loans
   Pre-Modification
Recorded
Investment
   Post-Modification
Recorded
Investment
 
Three months ended September 30, 2021                      
     Extended payment terms  3   $302   $ 302  

 

There were no new TDR modifications during the nine months ended September 30, 2022.

 

      Modification Type  Number of TDR
Loans
   Pre-Modification
Recorded
Investment
   Post-Modification
Recorded
Investment
 
Nine months ended September 30, 2021                  
      Interest rate concession  1   $357   $357 
      Extended payment terms  3    302    302 
        4   $659   $659 

 

During the three and nine month period ending September 30, 2022 or 2021, no loans previously modified as TDRs within the previous 12 months defaulted.

20 

 

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):

 

   As of and for the Nine Months Ended
September 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  $319,193   $   $268,858   $   $280,665   $ 
Interest-bearing demand   59,949    78    67,027    130    52,479    167 
Money Market   539,532    2,271    478,897    1,401    500,862    1,888 
Savings   17,514    13    14,927    9    16,106    13 
Time Deposits   173,819    444    222,028    1,012    208,929    1,192 
Total deposits  $1,110,007   $2,806   $1,051,737   $2,552   $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 September 30, 2022, commitments to extend credit and standby letters of credit totaled $347.2 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 September 30, 2022, $0.1 million 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 September 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.

21 

 

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):

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Numerator:                    
Net income  $4,419   $3,834   $12,220   $11,391 
Preferred stock dividends   (39)   (30)   (116)   (90)
Net income applicable to common equity   4,380    3,804    12,104    11,301 
                     
 Undistributed earnings allocated to participating securities   (199)   (182)   (544)   (539)
Net income applicable to common shareholders  $4,181   $3,622   $11,560   $10,762 
                     
Denominator:                    
Basic - Total weighted-average basic shares outstandings   5,219,863    5,141,214    5,201,524    5,158,816 
Stock options   234,301    150,928    208,442    111,322 
Diluted - Total weighted-average diluted shares outstanding   5,454,164    5,292,142    5,409,966    5,270,138 
                     
Basic income per share  $0.80   $0.71   $2.22   $2.09 
Diluted income per share  $0.77   $0.68   $2.14   $2.04 

 

The Company excluded 51,500 and 128,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $28.45 and $26.39 from the computation of diluted earnings per share for the three and nine months ended September 30, 2022, respectively, because of their antidilutive effect.

 

The Company excluded 107,500 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $24.21 from the computation of diluted earnings per share for the three and nine months ended September 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).

 

   Three Months Ended   Nine Months Ended 
   September 30, 2022   September 30, 2022 
   AFS
Securities
   Total   AFS
Securities
   Total 
Balance, beginning of period  $(7,329)  $(7,329)  $1,186   $1,186 
Change in net unrealized holding gains on AFS securities   (4,765)   (4,765)   (15,653)   (15,653)
Income tax effect   1,039    1,039    3,412    3,412 
Balance, end of period  $(11,055)  $(11,055)  $(11,055)  $(11,055)
                     
   Three Months Ended   Nine Months Ended 
   September 30, 2021   September 30, 2021 
   AFS
Securities
   Total   AFS
Securities
   Total 
Balance, beginning of period  $1,454   $1,454   $2,159   $2,159 
Change in net unrealized holding losses on AFS securities   (526)   (526)   (1,427)   (1,427)
Income tax effect   114    114    310    310 
Balance, end of period  $1,042   $1,042   $1,042   $1,042 

 

There were no line items in the Consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income in the three or nine months ended September 30, 2022 and 2021.

22 

 

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).

 

   As of and for the Three Months Ended September 30, 2022 
   Core Bank   CarBucks   Other   Total 
Interest income  $10,555   $5,291   $702   $16,548 
Interest expense   203    1,163    477    1,843 
Net interest income   10,352    4,128    225    14,705 
Provision for loan losses   334    726        1,060 
Noninterest income   543    74    53    670 
Noninterest expense   6,560    2,792    (877)   8,475 
Net income before taxes   4,001    684    1,155    5,840 
Income tax expense   974    170    277    1,421 
Net income  $3,027   $514   $878   $4,419 
                     
Total assets  $1,013,895   $110,431   $129,641   $1,253,967 
                               
   As of and for the Three Months Ended September 30, 2021 
   Core Bank   CarBucks   Other   Total 
Interest income  $8,795   $4,754   $461   $14,010 
Interest expense   418    374    431    1,223 
Net interest income   8,377    4,380    30    12,787 
Provision for loan losses   386    108        494 
Noninterest income   443    38    177    658 
Noninterest expense   5,409    2,487    11    7,907 
Net income before taxes   3,025    1,823    196    5,044 
Income tax expense   726    436    48    1,210 
Net income  $2,299   $1,387   $148   $3,834 
                     
Total assets  $970,034   $90,434   $142,199   $1,202,667 

23 

 
   As of and for the Nine Months Ended September 30, 2022 
   Core Bank   CarBucks   Other   Total 
Interest income  $27,673   $15,802   $1,842   $45,317 
Interest expense   413    2,408    1,360    4,181 
Net interest income   27,260    13,394    482    41,136 
Provision for loan losses   167    1,320        1,487 
Noninterest income   1,528    195    210    1,933 
Noninterest expense   17,175    8,257    55    25,487 
Net income before taxes   11,446    4,012    637    16,095 
Income tax expense   2,756    966    153    3,875 
Net income  $8,690   $3,046   $484   $12,220 
                     
Total assets  $1,013,895   $110,431   $129,641   $1,253,967 
                               
   As of and for the Nine Months Ended September 30, 2021 
   Core Bank   CarBucks   Other   Total 
Interest income  $25,823   $13,879   $1,228   $40,930 
Interest expense   1,580    1,079    1,296    3,955 
Net interest income   24,243    12,800    (68)   36,975 
Provision for loan losses   977    68        1,045 
Noninterest income   1,561    112    328    2,001 
Noninterest expense   15,568    7,362    47    22,977 
Net income before taxes   9,259    5,482    213    14,954 
Income tax expense   2,206    1,306    51    3,563 
Net income  $7,053   $4,176   $162   $11,391 
                     
Total assets  $970,034   $90,434   $142,199   $1,202,667 

 

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.

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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):

 

   September 30, 2022 
   Level 1   Level 2   Level 3   Total 
Assets:                    
U.S. government agencies  $   $25,227   $   $25,227 
State and municipal obligations       20,162        20,162 
Mortgage-backed securities - agency       25,593        25,593 
Collateralized mortgage obligations - agency       21,782        21,782 
Asset-backed securities       2,099        2,099 
Corporate bonds           13,398    13,398 
Total recurring assets at fair value  $   $94,863   $13,398   $108,261 
     
   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 
Mortgage-backed securities - agency       33,418        33,418 
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 September 30, 2022 or December 31, 2021.

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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):

 

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
                 
Balance at beginning of period  $15,329   $7,604   $12,403   $4,605 
Corporate bond additions       1,500    3,250    4,450 
Corporate bond fair value adjustments   (1,931)   187    (2,255)   236 
Balance at end of period  $13,398   $9,291   $13,398   $9,291 

 

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):

 

   September 30, 2022 
   Level 1   Level 2   Level 3   Total 
Collateral dependent impaired loans:                    
One-to four family residential  $   $   $39   $39 
Commercial real estate           290    290 
Real estate owned:                    
Other construction and land  $   $   $732   $732 
Total  $   $   $1,061   $1,061 
     
   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 

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There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2022 or December 31, 2021.

 

Impaired loans totaling $2.4 million at September 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 September 30, 2022 and December 31, 2021.

 

           September 30,   December 31, 
           2022   2021 
   Valuation Technique   Unobservable Input   General Range   General Range 
Impaired loans  Discounted Appraisals   Collateral discounts    0% - 15%    0% - 15% 
Real estate owned  Discounted Appraisals   Collateral discounts and estimated selling cost    43%   10% - 43% 
Corporate bonds  Discounted Cash Flows   Recent similar executed financing transactions    3% - 20%    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):

 

   Carrying   Fair Value Measurements at September 30, 2022 
   Amount   Total   Level 1   Level 2   Level 3 
Assets:                         
Cash and equivalents  $108,215   $108,215   $108,215   $   $ 
Securities available for sale   108,261    108,261        94,863    13,398 
Securities held to maturity   5,991    5,799        5,799     
Loans receivable, net   995,061    964,421            964,421 
Other investments, at cost   1,911    1,911        1,911     
Accrued interest receivable   5,335    5,335        5,335     
BOLI   15,014    15,014        15,014     
                          
Liabilities:                         
Demand deposits, money market and savings  $936,188   $936,188   $   $936,188   $ 
Time deposits   173,819    182,745        182,745     
Federal Home Loan Bank advances   5,000    5,202        5,202     
Junior subordinated debentures   35,955    32,813        32,813     
Accrued interest payable   653    653        653     
                                   
   Carrying   Fair Value Measurements at December 31, 2021 
   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     

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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 September 30, 2022, the aggregate merger consideration had a total value of approximately $192.6 million, or $33.29 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 customary closing conditions. The parties have received the approval of the Company’s shareholders and all required regulatory approvals and anticipate closing the Merger during 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 September 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 October 19, 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 November 18, 2022 to shareholders of record on November 04, 2022.

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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, which could impair our liquidity;
·Changes in deposit flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions;
·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, 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;
·Changes in technology;
·The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

29 

 
·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, supply chains disruptions in transportation, war or terrorist activities, essential utility outages or trade disputes and tariffs;
·the failure of either company to satisfy any of the 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; 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.

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Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 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 $50.2 million to $1.3 billion at September 30, 2022, or 4.17%, from December 31, 2021. This increase in assets was primarily due to increases in loans of $61.6 million.

Total liabilities increased $51.2 million to $1.2 billion at September 30, 2022, or 4.62%, from December 31, 2021, due primarily to increases in total deposits of $51.0 million, which includes increases in noninterest-bearing deposits of $38.5 million.

Total shareholders’ equity decreased $0.9 million to $96.5 million, or 0.93%, from December 31, 2021, due to 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 $0.37 to $18.24 at September 30, 2022 from $18.61 at December 31, 2021. Tangible book value per common share, a non-GAAP measure, also decreased $0.37 to $18.10 at September 30, 2022 from $18.47 at December 31, 2021.

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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)  September 30,
2022
   December 31,
2021
 
Book Value (GAAP)  $96,497   $97,405 
Book Value Attributable to Preferred Shares   (1,204)   (1,204)
Book Value Attributable to Common Shares   95,293    96,201 
Outstanding common shares   5,225,042    5,168,681 
Book Value Per Common Share  $18.24   $18.61 
           
Book Value (GAAP)  $96,497   $97,405 
Book Value Attributable to Preferred Shares   (1,204)   (1,204)
Book Value Attributable to Common Shares   95,293    96,201 
Goodwill and intangibles   (737)   (737)
Book Value Attributable to Common Shares (Tangible)  $94,556   $95,464 
Outstanding common shares   5,225,042    5,168,681 
Tangible Book Value Per Common Share  $18.10   $18.47 
           

Cash and Cash Equivalents

Total cash and cash equivalents decreased $15.9 million to $108.2 million at September 30, 2022 from $124.1 million at December 31, 2021, primarily due to the growth of loans exceeding the growth of 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).

   September 30, 2022   December 31, 2021 
   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 
Available for sale                    
U.S.  government agencies  $27,454   $25,227   $9,479   $9,439 
State and municipal obligations   24,862    20,162    26,011    26,677 
Mortgage-backed securities - agency   28,938    25,593    33,191    33,418 
Collateralized mortgage obligations - agency   23,537    21,782    26,968    27,435 
Asset-backed securities   2,159    2,099    2,599    2,590 
Corporate bonds   15,450    13,398    12,200    12,403 
   $122,400   $108,261   $110,448   $111,962 
                     
Held to maturity                    
U.S.  government agencies  $5,991   $5,799   $   $ 
   $5,991   $5,799   $   $ 
                    

AFS investment securities decreased $3.7 million, or 3.31%, to $108.3 million at September 30, 2022 from $112.0 million at December 31, 2021. During the nine months ended September 30, 2022, $3.3 million of AFS corporate bonds and $18.0 million of AFS U.S. government agencies were purchased. HTM investment securities increased $6.0 million, to $6.0 million at September 30, 2022 from zero million at December 31, 2021. During the nine months ended September 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.

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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 September 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 September 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%  $17,973    1.46%  $9,481    1.31%  $    0.00%  $27,454    1.41%
State and municipal obligations       0.00%       0.00%   6,342    2.07%   18,520    2.35%   24,862    2.28%
Mortgage-backed securities - agency        0.00%   130    3.83%   7,167    2.10%   21,641    1.78%   28,938    1.87%
Collateralized mortgage obligations - agency       0.00%        0.00   12,186    2.45   11,351    1.90   23,537    2.18%
Asset-backed securities       0.00%       0.00%   436    2.93%   1,723    3.27%   2,159    3.20%
Corporate bonds       0.00%       0.00%   14,700    4.03%   750    4.92%   15,450    4.07%
Total securities available-for-sale  $    0.00%  $18,103    1.48%  $50,312    2.60%  $53,985    2.09%  $122,400    2.21%
                                                   
Held to maturity                                                  
U.S. government agencies  $    0.00%  $5,991    2.59%  $    0.00%  $    0.00%  $5,991    2.59%
Total securities held to maturity  $    0.00%  $5,991    2.59%  $    0.00%  $    0.00%  $5,991    2.59%

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.

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   September 30, 2022   December 31, 2021 
   Balance   Percent   Balance   Percent 
Real estate mortgage loans:                    
One-to four-family residential  $145,107    14.57   $132,836    14.22 
Commercial real estate   444,003    44.59    423,552    45.36 
Home equity loans and lines of credit   21,970    2.21    21,568    2.31 
Residential construction   37,927    3.81    38,881    4.16 
Other construction and land   84,401    8.48    75,682    8.10 
Commercial   255,817    25.69    234,355    25.09 
Consumer   6,504    0.65    7,129    0.76 
Loans receivable, gross   995,729    100.00    934,003    100.00 
Net deferred loan costs (fees)   (668)        (528)     
                     
Loans receivable, net of deferred fees  $995,061        $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 September 30, 2022 and December 31, 2021, respectively. As of September 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 September 30, 2022. We had one loan 90 days or more past due that was still accruing interest as of December 31, 2021 that was 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 September 30, 2022.

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   Delinquent loans 
   30-59 Days   60-89 Days   90 Days and
Over
   Total 
September 30, 2022                    
One-to-four family residential  $   $   $39   $39 
Commercial       15        15 
Total delinquent loans  $   $15   $39   $54 
Percent of total loans, net   0.00%   0.00%   0.00%   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 September 30, 2022. Delinquent loans decreased $0.6 million, or 92.22%, to $0.1 million at September 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).

 

   September 30,   December 31, 
   2022   2021 
Nonaccrual loans:          
Real estate loans:          
One-to-four family residential  $61   $107 
Commercial   291    767 
Commercial   335    473 
Consumer       2 
Total nonperforming loans   687    1,349 
           
REO:          
One-to-four family residential        
Commercial real estate        
Other construction and land   732    842 
Total foreclosed real estate   732    842 
Total nonperforming assets  $1,419   $2,191 
           
TDRs still accruing  $1,650   $1,780 
           
Ratios:          
Nonperforming loans to total loans   0.07%   0.14%
Nonperforming assets to total assets   0.11%   0.18%

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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).

 

   September 30,   December 31, 
   2022   2021 
Classified loans:          
Substandard  $2,904   $4,304 
Doubtful        
Loss        
Total classified loans:   2,904    4,304 
Special mention   3,733    9,647 
Total criticized loans  $6,637   $13,951 
           
Total classified loans as a % of total loans, net   0.29%   0.46%
Total criticized loans as a % of total loans, net   0.67%   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.

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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;
·Collateral values;
·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 (recovery) detail as a percentage of average loans by loan composition for the periods indicated (in thousands).

 

   Nine Months Ended September 30, 
   2022   2021 
   Charge-Off
(Recovery)
   Percent   Charge-Off
(Recovery)
   Percent 
Real Estate:                    
One-to-four family residential  $(109)   -0.06%  $9    0.01%
Commercial real estate   (53)   -0.01%   52    0.01%
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   802    0.26%   (157)   -0.05%
Consumer   10    0.11%       0.00%
Total  $631        $(113)     
                     
Ratios:                    
Net charge-offs (recoveries) to average loans outstanding        0.07%        (0.01)%
Allowance to nonperforming loans at period end(1)        2,122.13%        1,190.81%
Allowance to total loans at period end        1.47%        1.47%
(1)At September 30, 2022, total nonperforming loans were comprised solely of nonaccrual loans.

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Our allowance as a percentage of total loans held steady at 1.47% at September 30, 2022, consistent with 1.47% at December 31, 2021 and September 30, 2021. Despite decreases in historic charge off rates and qualitative adjustments, our CarBucks loan portfolio, which holds a higher allowance ratio, grew at a faster rate than that of the Core Bank during the interim period. With these changes, the overall results of the allowance to total loans ratio remained unchanged.

 

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 2,122.13% at September 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).

 

   September 30, 2022   December 31, 2021 
   Balance   Percent   Balance   Percent 
Noninterest-bearing demand  $319,193    28.8   $280,665    26.5 
Interest-bearing demand   59,949    5.4    52,479    5.0 
Money Market   539,532    48.5    500,862    47.3 
Savings   17,514    1.6    16,106    1.5 
Time Deposits   173,819    15.7    208,929    19.7 
   $1,110,007    100.0   $1,059,041    100.0 

At September 30, 2022 and December 31, 2021, we estimate that we have approximately $457.1 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 $51.0 million, or 4.81%, for the nine months ended September 30, 2022 compared to December 31, 2021. The increase in total deposits was mainly attributable to the $38.7 million, or 7.72%, increase in money market accounts, the $7.5 million, or 14.23%, increase in interest-bearing demand accounts and $38.5 million, or 13.73%, increase in noninterest-bearing demand accounts, partially offset by a $35.1 million, or 16.80%, decline in time deposits.

Discussion of Results of Operation

 

Comparison of the Three Months Ended September 30, 2022 and September 30, 2021.

 

General

 

Net income for the three months ended September 30, 2022 was $4.4 million, compared to $3.8 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 $1.9 million, partially offset by an increase in provision expense of $0.6 million and noninterest expense totaling $0.6 million. Of noninterest expenses during third quarter, $0.1 million is related to the Company’s pending merger with First Bancorp.

 

Net Interest Income

 

Net interest income increased $1.9 million, or 15.00%, to $14.7 million for the three months ended September 30, 2022, compared to $12.8 million for the same period in 2021. The increase in net interest income was primarily due to higher volumes in loans (both Core Bank and CarBucks) and yields on Core Bank loans, 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.

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   For the Three Months Ended September 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)  $864,217   $9,884    4.54%  $835,818   $8,748    4.15%
Loans, Carbucks(2)   110,010    5,291    19.08%   92,110    4,754    20.48%
Investments - taxable   110,397    631    2.27%   117,879    389    1.32%
Investments - tax exempt(3)   10,866    87    3.18%   12,738    88    2.76%
Federal funds sold and other interest earning deposits   130,887    654    1.98%   81,085    27    0.13%
Other investments, at cost   2,553    19    2.95%   4,147    23    2.22%
                               
Total interest-earning assets   1,228,930    16,566    5.35%   1,143,777    14,029    4.87%
                               
Noninterest-earning assets   38,449              36,627           
                               
Total assets  $1,267,379             $1,180,404           
                               
Interest-bearing liabilities:                              
Savings accounts  $17,631   $4    0.09%  $13,437   $3    0.10%
Time deposits   176,577    144    0.32%   234,642    221    0.37%
Money market accounts   554,991    1,185    0.85%   453,974    487    0.43%
Interest bearing transaction accounts   60,057    28    0.18%   68,525    45    0.26%
Total interest bearing deposits   809,256    1,361    0.67%   770,578    756    0.39%
                               
FHLB advances   5,000    5    0.40%   16,000    36    0.89%
Junior subordinated debentures   35,936    477    5.27%   35,816    431    4.78%
Other borrowings           0.00%           0.00%
                               
Total interest-bearing liabilities   850,192    1,843    0.86%   822,394    1,223    0.59%
                               
Noninterest-bearing deposits   312,123              260,396           
                               
Other non interest bearing liabilities   5,979              5,537           
                               
Total liabilities   1,168,294              1,088,327           
Total equity   99,085              92,077           
                               
Total liabilities and equity  $1,267,379             $1,180,404           
                               
Tax-equivalent net interest income       $14,723             $12,806      
                               
Net interest-earning assets(4)  $378,738             $321,383           
                               
Average interest-earning assets to interest-bearing liabilities   144.55%             139.08%          
                               
Tax-equivalent net interest rate spread(5)             4.49%             4.28%
Tax-equivalent net interest margin(6)             4.75%             4.44%

(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 $18,000 and $19,000 for the three months ended September 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.

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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 September 30, 2022 
   Compared to the Three Months Ended September 30, 2021 
   Increase (decrease) due to: 
(In thousands)  Volume   Rate   Total 
Interest-earning assets:               
Loans - Core Bank(1)  $305   $831   $1,136 
Loans - CarBucks(1)   877    (340)   537 
Investment - taxable   (26)   268    242 
Investments - tax exempt(2)   (14)   13    (1)
Interest-earning deposits   26    601    627 
Other investments, at cost   (10)   6    (4)
Total interest-earning assets   1,158    1,379    2,537 
                
Interest-bearing liabilities:               
Savings accounts   1        1 
Time deposits   (50)   (27)   (77)
Money market accounts   128    570    698 
Interest bearing transaction accounts   (5)   (12)   (17)
FHLB advances   (17)   (14)   (31)
Junior subordinated debentures   1    45    46 
Other borrowings            
Total interest-bearing liabilities   58    562    620 
Change in tax-equivalent net interest income  $1,100   $817   $1,917 
(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 $14.7 million for the three months ended September 30, 2022, compared to $12.8 million for the same period in 2021, due to improvements in volume and interest rates.

 

The increase in tax-equivalent net interest income of $1.1 million related to volume was primarily the result of higher average loan balances (both Core Bank and CarBucks) which increased $46.3 million, and a $58.1 million decrease in average time deposits for the three months ended September 30, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of $101.0 million in money market balances.

The increase in tax-equivalent net interest income of $0.8 million related to rate was primarily the result of increased yields on Core Bank loans, interest earning deposits and taxable investments, partially offset by decreased yields on CarBucks loans and increased rates on money market accounts.

Our tax-equivalent net interest margin was 4.75% for the three months ended September 30, 2022, compared to 4.44% for the same period in 2021, an increase of 31 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 September 30, 2022 of $1.1 million due to organic loan growth and net charge off activity. This compares to a $0.5 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, price inflation and the associated impact on monetary policy, there is a risk that loss rates could increase.

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Noninterest Income

 

The following table summarizes the components of noninterest income and the corresponding changes between the three months ended September 30, 2022 and 2021 (in thousands):

 

   Three Months Ended September 30,     
   2022   2021   Change 
Service charges on deposit accounts  $380   $320   $60 
Investment securities loss   (27)       (27)
Bank owned life insurance   80    84    (4)
Net gain on sale of premises and equipment   30    6    24 
Other noninterest income   207    248    (41)
Total noninterest income  $670   $658   $12 

Our noninterest income increased less than $0.1 million to $0.7 million in the three months ended September 30, 2022, compared to the same period in 2021 due primarily to increase in service charges on deposit accounts, partially off set by decreases in other noninterest income.

Noninterest Expense

 

The following table summarizes the components of noninterest expense and the corresponding change between the three months ended September 30, 2022 and 2021 (in thousands):

 

   Three Months Ended September 30,     
   2022   2021   Change 
Compensation and employee benefits  $5,771   $5,367   $404 
Net occupancy   574    584    (10)
Federal deposit insurance   128    157    (29)
Professional and advisory   174    314    (140)
Merger expenses   143        143 
Data processing   579    509    70 
Marketing and advertising   45    49    (4)
Net cost of operation of real estate owned   1    11    (10)
Other noninterest expense   1,060    916    144 
Total noninterest expenses  $8,475   $7,907   $568 

Our noninterest expense increased $0.6 million to $8.5 million in the three months ended September 30, 2022, compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of $0.4 million, other noninterest expense of $0.1 million, and merger expenses of $0.1 million, partially offset by a decrease in professional and advisory expenses of $0.1 million. The increase in compensation and employee benefits is primarily related to annual raises and increases in employee benefits, incentives and commissions.

 

Income Taxes

 

Income tax expense totaled $1.4 million for the three months ended September 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 24.0% for the three months ended September 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.

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Comparison of the Three Months Ended September 30, 2022 and 2021.

 

   As of and for the Three Months Ended September 30, 2022 
   Core Bank   CarBucks   Other   Total 
Interest income  $10,555   $5,291   $702   $16,548 
Interest expense   203    1,163    477    1,843 
Net interest income   10,352    4,128    225    14,705 
Provision for loan losses   334    726        1,060 
Noninterest income   543    74    53    670 
Noninterest expense   5,521    2,792    162    8,475 
Net income before taxes   5,040    684    116    5,840 
Income tax expense   1,224    170    27    1,421 
Net income  $3,816   $514   $89   $4,419 
                     
Total assets  $1,013,895   $110,431   $129,641   $1,253,967 
                     
   As of and for the Three Months Ended September 30, 2021 
   Core Bank   CarBucks   Other   Total 
Interest income  $8,795   $4,754   $461   $14,010 
Interest expense   418    374    431    1,223 
Net interest income   8,377    4,380    30    12,787 
Provision for loan losses   386    108        494 
Noninterest income   443    38    177    658 
Noninterest expense   5,409    2,487    11    7,907 
Net income before taxes   3,025    1,823    196    5,044 
Income tax expense   726    436    48    1,210 
Net income  $2,299   $1,387   $148   $3,834 
                     
Total assets  $970,034   $90,434   $142,199   $1,202,667 

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 $1.5 million to $3.8 million for the three months ended September 30, 2022 compared to $2.3 million for the same period in 2021. Net interest income increased $2.0 million to $10.4 million for the three months ended September 30, 2022 from $8.4 million for the same period a year ago primarily due to increased volume of Core Bank Loans and increased yields on Core Bank loans, taxable investments and interest bearing deposits, partially offset by an increase in interest rates on money market accounts. Provision for loan losses decreased $0.1 million for the three months ended September 30, 2022 compared to 2021 due to higher net recovery activity, partially offset by organic loan growth during the third quarter of 2022 as compared to the third quarter of 2021. Noninterest expense increased $0.1 million to $5.5 million for the 2022 period compared to $5.4 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. During the three-month period, the inventory typically consists of over 12,000 floored used vehicles with an average price of $8,400 per unit, generally has an average 70-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.

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CarBucks net income decreased $0.9 million to $0.5 million for the three months ended September 30, 2022 compared to $1.4 million for the same three-month period in 2021. Net interest income decreased $0.3 million to $4.1 million for the 2022 period from $4.4 million for the same period a year ago primarily due to increased interest expense and lower fees related to inventory, partially offset by increased volume of CarBucks loans. Provision for loan losses increased $0.6 million for the three months ended September 30, 2022 compared to 2021 due to higher net charge offs during the third quarter of 2022 as compared to the same period in 2021 and, partially offset by slower loan growth in the third quarter of 2022 as compared to that in the same period in 2021. Noninterest expense increased $0.3 million to $2.8 million for the 2022 period compared to $2.5 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 $0.1 million to $0.1 million for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to an increase in noninterest expense, specifically merger expenses related to our pending merger with First Bancorp, partially offset by increased interest income related to our taxable investments.

 

Comparison of the Nine Months Ended September 30, 2022 and September 30, 2021.

 

General

 

Net income for the nine months ended September 30, 2022 was $12.2 million, compared to $11.4 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 $4.2 million, partially offset by an increase in provision expense of $0.4 million and an increase in noninterest expenses of $2.5 million, $1.0 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 $4.2 million, or 11.25%, to $41.1 million for the nine months ended September 30, 2022, compared to $37.0 million for the same period in 2021. The increase in net interest income was primarily due a higher volume of loans (both Core Bank and CarBucks), yields on Core Bank loans, taxable investments and interest-earning deposits and decreases in the cost of time deposits. This was partially offset by the decline in CarBucks loans and increase in the balance and costs 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.

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   For the Nine Months Ended September 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)  $841,677   $26,719    4.24%  $820,177   $25,670    4.18%
Loans, Carbucks(2)   108,988    15,802    19.38%   87,504    13,879    21.21%
Investments - taxable   110,204    1,630    1.98%   112,538    1,015    1.21%
Investments - tax exempt(3)   11,412    262    3.07%   12,708    265    2.78%
Federal funds sold and other interest earning deposits   133,897    911    0.91%   71,678    69    0.13%
Other investments, at cost   2,687    48    2.39%   5,118    88    2.30%
                               
Total interest-earning assets   1,208,865    45,372    5.02%   1,109,723    40,986    4.94%
                               
Noninterest-earning assets   36,544              37,046           
                               
Total assets  $1,245,409             $1,146,769           
                               
Interest-bearing liabilities:                              
Savings accounts  $16,966   $13    0.10%  $12,301   $9    0.10%
Time deposits   190,608    444    0.31%   252,665    1,012    0.54%
Money market accounts   540,039    2,271    0.56%   427,296    1,401    0.44%
Interest bearing transaction accounts   57,162    78    0.18%   66,654    130    0.26%
Total interest bearing deposits   804,775    2,806    0.47%   758,916    2,552    0.45%
                               
FHLB advances   5,000    15    0.40%   16,000    107    0.89%
Junior subordinated debentures   35,907    1,360    5.06%   35,787    1,296    4.84%
Other borrowings           0.00%   135        0.00%
                               
Total interest-bearing liabilities   845,682    4,181    0.66%   810,838    3,955    0.65%
                               
Noninterest-bearing deposits   295,465              241,491           
                               
Other non interest bearing liabilities   5,894              5,605           
                               
Total liabilities   1,147,041              1,057,934           
Total equity   98,368              88,835           
                               
Total liabilities and equity  $1,245,409             $1,146,769           
                               
Tax-equivalent net interest income       $41,191             $37,031      
                               
Net interest-earning assets(4)  $363,183             $298,885           
                               
Average interest-earning assets to interest-bearing liabilities   142.95%             136.86%          
                               
Tax-equivalent net interest rate spread(5)             4.36%             4.29%
Tax-equivalent net interest margin(6)             4.56%             4.46%
(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 $55,000 and $56,000 for the nine months ended September 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.

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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 Nine Months Ended September 30, 2022 
   Compared to the Nine Months Ended September 30, 2021 
   Increase (decrease) due to: 
(In thousands)       Volume   Rate   Total 
Interest-earning assets:               
Loans - Core Bank(1)  $679   $370   $1,049 
Loans - CarBucks(1)   3,191    (1,268)   1,923 
Investment - taxable   (21)   636    615 
Investments - tax exempt(2)   (28)   25    (3)
Interest-earning deposits   105    737    842 
Other investments, at cost   (43)   3    (40)
Total interest-earning assets   3,883    503    4,386 
                
Interest-bearing liabilities:               
Savings accounts   4        4 
Time deposits   (210)   (358)   (568)
Money market accounts   420    450    870 
Interest bearing transaction accounts   (17)   (35)   (52)
FHLB advances   (51)   (41)   (92)
Junior subordinated debentures   4    60    64 
Other borrowings            
Total interest-bearing liabilities   150    76    226 
Change in tax-equivalent net interest income  $3,733   $427   $4,160 
(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 $41.2 million for the nine months ended September 30, 2022, compared to $37.0 million for the same period in 2021, due to improvements in volume and interest rates.

 

The increase in tax-equivalent net interest income of $3.7 million related to volume was primarily the result of higher average loan (both Core Bank and CarBucks) which increased $43.0 million, and a $62.1 million decrease in average time deposits for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of $112.7 million in money market balances.

The increase in tax-equivalent net interest income of $0.4 million related to rate was primarily the result of increased yields on Core Bank loans, interest-earning deposits and taxable investments and decreased costs on time deposits, partially offset by decreased yields on CarBucks loans and increased costs on money market accounts.

Our tax-equivalent net interest margin was 4.56% for the nine months ended September 30, 2022, compared to 4.46% for the same period in 2021, an increase of 10 basis points. The increase in net interest margin was primarily attributable to higher average loan balances (both Core Bank and CarBucks) and higher yields on Core Bank loans, taxable investments and interest-bearing deposits, partially offset by lower yields on CarBucks loans.

Provision for Loan Losses

 

We recorded a provision for loan losses for the nine months ended September 30, 2022 of $1.5 million due to organic loan growth, net charge off activity and certain qualitative adjustments. This compares to a $1.0 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, price inflation and the associated impact on monetary policy, there is a risk that loss rates could increase.

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Noninterest Income

 

The following table summarizes the components of noninterest income and the corresponding changes between the nine months ended September 30, 2022 and 2021 (in thousands):

 

   Nine Months Ended September 30,     
   2022   2021   Change 
Service charges on deposit accounts  $1,082   $910   $172 
Investment securities loss   (27)       (27)
Bank owned life insurance   236    261    (25)
Net gain on sale of premises and equipment   66    90    (24)
Other noninterest income   576    740    (164)
Total noninterest income  $1,933   $2,001   $(68)

Our noninterest income decreased $0.1 million to $1.9 million in the nine months ended September 30, 2022, compared to the same period in 2021, due primarily to decreases in 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 nine months ended September 30, 2022 and 2021 (in thousands):

 

   Nine Months Ended September 30,     
   2022   2021   Change 
Compensation and employee benefits  $16,987   $15,428   $1,559 
Net occupancy   1,730    1,732    (2)
Federal deposit insurance   345    482    (137)
Professional and advisory   686    888    (202)
Merger expenses   1,039        1,039 
Data processing   1,593    1,536    57 
Marketing and advertising   157    128    29 
Net cost of operation of real estate owned   38    140    (102)
Other noninterest expense   2,912    2,643    269 
Total noninterest expenses  $25,487   $22,977   $2,510 

Our noninterest expense increased $2.5 million to $25.5 million in the nine months ended September 30, 2022, compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of $1.6 million, increases in merger expenses of $1.0 million and increases in other noninterest expenses of $0.3 million. The increase in compensation and employee benefits is primarily related to annual raises and increases in employee benefits, incentives and commissions. Merger expenses related to our pending merger with First Bancorp.

 

Income Taxes

 

Income tax expense totaled $3.9 million for the nine months ended September 30, 2022, compared to $3.6 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 24.1% and 23.8% for the nine months ended September 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 September 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.

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Comparison of the Nine Months Ended September 30, 2022 and 2021.

 

   As of and for the Nine Months Ended September 30, 2022 
   Core Bank   CarBucks   Other   Total 
Interest income  $27,673   $15,802   $1,842   $45,317 
Interest expense   413    2,408    1,360    4,181 
Net interest income   27,260    13,394    482    41,136 
Provision for loan losses   167    1,320        1,487 
Noninterest income   1,528    195    210    1,933 
Noninterest expense   16,136    8,257    1,094    25,487 
Net income before taxes   12,485    4,012    (402)   16,095 
Income tax expense   3,006    966    (97)   3,875 
Net income  $9,479   $3,046   $(305)  $12,220 
                     
Total assets  $1,013,895   $110,431   $129,641   $1,253,967 
                     
   As of and for the Nine Months Ended September 30, 2021 
   Core Bank   CarBucks   Other   Total 
Interest income  $25,823   $13,879   $1,228   $40,930 
Interest expense   1,580    1,079    1,296    3,955 
Net interest income   24,243    12,800    (68)   36,975 
Provision for loan losses   977    68        1,045 
Noninterest income   1,561    112    328    2,001 
Noninterest expense   15,568    7,362    47    22,977 
Net income before taxes   9,259    5,482    213    14,954 
Income tax expense   2,206    1,306    51    3,563 
Net income  $7,053   $4,176   $162   $11,391 
                     
Total assets  $970,034   $90,434   $142,199   $1,202,667 

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 $2.4 million to $9.5 million for the nine months ended September 30, 2022 compared to $7.1 million for the same period in 2021. Net interest income increased $3.0 million to $27.3 million for the nine months ended September 30, 2022 from $24.2 million for the same period a year ago primarily due to increased volume of Core Bank Loans, decrease volume of time deposits and increased yields on Core Bank loans, taxable investments and interest bearing deposits, partially offset by increased volume and rates on money market accounts. Provision for loan losses decreased $0.8 million for the nine months ended September 30, 2022 compared to 2021 due to lower loan growth, lower historic net charge off activity, lower qualitative adjustments to the allowance for loan losses and higher net recovery activity in the nine months ended September 30, 2022 as compared to the same period in 2021. Noninterest expense increased $0.6 million to $16.1 million for the 2022 period compared to $15.6 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense and merger expenses in 2022 related to the Company’s 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. During the nine-month period, the inventory typically consists of over 12,000 floored used vehicles with an average price of $8,300 per unit, generally has an average 68-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.

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CarBucks net income decreased $1.1 million to $3.0 million for the nine months ended September 30, 2022 compared to $4.2 million for the same nine-month period in 2021. Net interest income increased $0.6 million to $13.4 million for the nine months ended September 30, 2022 compared to $12.8 million for the same period a year ago primarily due to increased inventory and interest expense, partially offset by decreased fees on inventory. Provision for loan losses increased $1.3 million for the nine months ended September 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 $0.9 million to $8.3 million for the nine months ended September 30, 2022 compared to $7.4 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 decreased $0.5 million to a loss of $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to increased noninterest expense, partially offset by an increase in interest income related to our taxable investments and interest earning deposits. Of the noninterest expense, $1.0 million was related to the merger with First Bancorp.

 

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 September 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 September 30, 2022, cash and cash equivalents totaled $108.2 million. Included in this total was $73.0 million held at the FRB, $0.5 million held at the FHLB, and $29.5 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 nine months ended September 30, 2022 and 2021 (in thousands):

 

   Nine Months Ended September 30, 
   2022   2021 
Investing activities:          
Purchases of investments  $(27,232)  $(38,520)
Maturities and principal repayments of investments   8,179    19,645 
Net increase in loans   (62,508)   (58,436)
           
Financing activities:          
Net increase in deposits  $50,966   $105,257 
Repurchase of common stock       (3,946)

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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 nine months ended September 30, 2022 or 2021.

 

At September 30, 2022, we had $347.2 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 September 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 September 30, 2022 (in thousands):

 

   Total   Used   Unused 
   Capacity   Capacity   Capacity 
FHLB               
Loan collateral capacity  $371,108           
Pledgeable marketable securities   113,752           
FHLB totals   484,860   $5,000   $479,860 
Fed funds lines   49,000        49,000 
   $533,860   $5,000   $528,860 

Capital Resources. Shareholders’ equity decreased $0.9 million to $96.5 million at September 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 $12.2 million and dividends declared of $2.1 million offset by net income of $12.2 million, stock-based compensation of $0.4 million, and stock options exercised of $0.8 million.

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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 September 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 September 30, 2022:                        
Tier 1 Leverage Capital  $136,682    10.79%  $50,651    >4.0%   $63,314    >5.0% 
Common Equity Tier 1 Capital  $136,682    12.62%  $75,806    >7.0%   $70,391    >6.5% 
Tier 1 Risk-based Capital  $136,682    12.62%  $92,050    >8.5%   $86,635    >8.0% 
Total Risk-based Capital  $150,232    13.87%  $113,709    >10.5%   $108,294    >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 September 30, 2022, and December 31, 2021 (in thousands).

 

   Actual   For Capital Adequacy
Purposes (2)
 
   Amount   Ratio   Amount   Ratio 
As of September 30, 2022:                
Tier I Leverage Capital  $115,062    8.86%  $50,666    >4.0% 
Common Equity Tier 1 Capital  $106,814    9.92%  $75,873    >7.0% 
Tier I Risk-based Capital  $115,062    10.72%  $92,132    >8.5% 
Total Risk Based Capital  $156,331    14.64%  $113,810    >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%.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2022. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of September 30, 2022, the end of the period covered by this Form 10-Q, the Company maintained effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes to the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings

In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended September 30, 2022.

 

As previously described, on June 21, 2022, the Company and First Bancorp entered into the Merger Agreement, pursuant to which, upon satisfaction of the conditions set forth in the Merger Agreement, the Company will merge with and into First Bancorp, with First Bancorp being the surviving corporation and the Company ceasing to be a separate entity.

 

Item 1A. Risk Factors

 

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 21, 2022, as well as cautionary statements contained in this report, including those under the caption “Cautionary Note Regarding Forward-Looking Statements,” risks and matters described elsewhere in this report and in our other filings with the SEC.

 

We are providing these additional risk factors to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

Risks Related to our Proposed Merger with First Bancorp

 

Combining the companies may be more difficult, costly, or time-consuming than expected.

 

The Company and First Bancorp have operated and, until the completion of the Merger, will continue to operate independently. The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on First Bancorp’s ability to successfully combine and integrate the businesses of First Bancorp and the Company in a manner that permits growth opportunities and does not materially disrupt the existing customer relations or result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures, and policies that could adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Merger. The loss of key employees could adversely affect the Company’s ability to successfully conduct its business, which could have an adverse effect on the Company’s financial results and the value of the Company’s common stock. If First Bancorp experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause First Bancorp and/or the Company to lose customers or cause customers to remove their accounts from First Bancorp and/or the Company and move their business to competing financial institutions. Integration efforts will also divert management attention and resources. These integration matters could have an adverse effect on each of First Bancorp and the Company during this transition period and for an undetermined period after completion of the Merger on the combined company.

 

Additionally, the combined company may not be able to successfully achieve the level of cost savings, revenue enhancements and other synergies that it expects, and may not be able to capitalize upon the existing customer relationships of each party to the extent anticipated, or it may take longer, or be more difficult or expensive than expected, to achieve these goals. These circumstances could have an adverse effect on the combined company’s business, results of operation and stock price.

 

The Merger is subject to certain closing conditions that, if not satisfied or waived, will result in the Merger not being completed. Termination of the Merger Agreement could negatively impact the Company.

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The Merger is subject to customary conditions to closing. If any condition to the Merger is not satisfied or waived, to the extent permitted by law, the Merger will not be completed. In addition, either First Bancorp or the Company may terminate the Merger Agreement under certain circumstances even if the Merger Agreement is approved by the Company’s shareholders, including but not limited to, if the Merger has not been completed on or before March 31, 2023.

 

If the Merger Agreement is terminated, there may be various consequences. For example, the Company’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed. These circumstances could have an adverse effect on the Company’s results of operation.

 

The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending.

 

The Merger Agreement restricts the Company from operating its business other than in the ordinary course and prohibits the Company from taking specified actions without First Bancorp’s consent until the Merger occurs. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger. In addition, uncertainty about the effect of the Merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is completed and may impair the Company’s ability to attract, retain and grow its customer base until the Merger is complete. Retention of certain employees by the Company may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company, the Company’s business could be harmed. Further, the uncertainty caused by the pending Merger could cause the Company’s customers and business associates to seek to change their existing business relationships with the Company. These circumstances could have an adverse effect on the combined company’s business, results of operation and stock price.

 

The market value of the merger consideration that the Company’s shareholders will receive as a result of the Merger may fluctuate.

 

If the Merger is completed, each share of the Company’s common stock will be converted into the right to receive 0.91 shares of First Bancorp common stock, and cash in lieu of any fractional shares. The market value of the merger consideration may vary from the closing price of First Bancorp common stock on the date the Merger was announced, on the date that the proxy statement/prospectus is mailed to the Company’s shareholders, on the date of the meeting of the Company’s shareholders, on the date the Merger is consummated, and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the respective businesses, operations and prospects, and the regulatory standing of First Bancorp and the Company. Many of these factors are beyond the control of the Company. Any change in the market price of First Bancorp common stock prior to completion of the Merger will affect the amount of and the market value of the merger consideration that the Company’s shareholders will receive upon completion of the Merger. Accordingly, at the time of the shareholders meeting, the Company’s shareholders will not know or be able to calculate the amount or the market value of the merger consideration they would receive upon completion of the Merger.

 

Further, the results of operations of the combined company following the Merger and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of First Bancorp and the Company.

 

If the Merger is not completed, the Company will have incurred substantial expenses without realizing the expected benefits of the Merger.

 

The Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the Merger.

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The Merger Agreement limits the Company’s ability to pursue an alternative acquisition proposal and could require the Company to pay a termination fee of $7.2 million under certain circumstances relating to alternative acquisition proposals.

 

The Merger Agreement prohibits the Company from soliciting, initiating, encouraging, inducing, or knowingly facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by the Company to First Bancorp of a termination fee in the amount of $7.2 million in the event that the Company or First Bancorp terminates the Merger Agreement for certain specified reasons related to an alternative acquisition proposal. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition.

 

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

None.

 

Item 3.Defaults Upon Senior Securities

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

None.

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Item 6. Exhibits

 

(d) Exhibits. See Exhibit Index Below

 

Exhibit
No.
 

Description

31.1   Certification of Chief Executive Officer of GrandSouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
31.2   Certification of Chief Financial Officer of GrandSouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
32.1   Certifications of the Chief Executive Officer and the Chief Financial Officer of GrandSouth Bancorporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   Financial Statements filed in Inline XBRL format.
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

 

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

 

Date: November 14, 2022 GrandSouth Bancorporation  
  By: /s/ John B. Garrett  
  Name: John B. Garrett  
  Title: Chief Financial Officer  
  (Authorized Officer)  

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