GRANDSOUTH BANCORPORATION 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: · statements of our goals, intentions and expectations;
· statements regarding our business plans, prospects, growth and operating
strategies;
· statements regarding the asset quality of our loan and investment portfolios;
and
· estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and
expectations and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change. The Company is under no duty to and does not undertake any
obligation to update any forward-looking statements after the date of this Form
10-Q except as required by law.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· Changes in the interest rate environment which could reduce anticipated or
actual margins;
· Restrictions or conditions imposed by our regulators on our operations;
· Increases in competitive pressure in the banking and financial services
industries;
· Changes in access to funding or increased regulatory requirements with regard
to funding;
· Changes in deposit flows;
· Credit losses as a result of declining real estate values, increasing interest
rates, increasing unemployment, changes in payment behavior or other factors;
· Credit losses due to loan concentration;
· Changes in the amount of our loan portfolio collateralized by real estate and
weaknesses in the real estate market;
· Our ability to attract and retain key personnel;
· The success and costs of our expansion into potential new markets;
· Changes in political conditions or the legislative or regulatory environment,
including governmental initiatives affecting the financial services industry,
including as a result of the presidential administration and Democratic control
of
· Changes in economic conditions in
local economies in which we conduct our operations, including, but not limited
to, due to the continuing negative impacts and disruptions resulting from the
outbreak of COVID-19 on the economies and communities we serve, which may have
an adverse impact on our business, operations and performance, and could have a
negative impact on our credit portfolio, share price, borrowers, and on the
economy as a whole, both domestically and globally;
· Changes occurring in business conditions and inflation;
· Increased cybersecurity risk, including potential business disruptions or
financial losses;
· 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;
· 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;
26
· 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; and
· The potential effects of events beyond our control that may have a
destabilizing effect on financial markets and the economy, such as epidemics
and pandemics, (including the potential continuing negative effects of COVID-19
on trade) supply chains disruptions in transportation, war or terrorist
activities, essential utility outages or trade disputes and tariffs.
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
Non-GAAP Measures
This Form 10-Q includes financial information determined by a method other than
in accordance with generally accepted accounting principles ("GAAP"). This
financial information includes the operating performance measure "Tangible book
value per common share, outstanding".
Management has included this non-GAAP measure because it believes this measure
may provide useful supplemental information for evaluating the Company's
underlying performance trends. Further, management uses this measure in managing
and evaluating the Company's business and intends to refer to them in
discussions about our operations and performance. Operating performance measures
should be viewed in addition to, and not as an alternative to or substitute for,
measures determined in accordance with GAAP, and are not necessarily comparable
to non-GAAP measures that may be presented by other companies.
Critical Accounting Estimates
Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as ofMarch 31, 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 ofSouth 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 forGrandSouth Bank (the "Bank"). OnOctober 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"), aDelaware 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
27 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
Total liabilities increased$50.5 million to$1.2 billion atMarch 31, 2022 , or 4.57%, fromDecember 31, 2021 , due primarily to increases in total deposits of$49.9 million , which includes increases in interest-bearing deposits of$46.8 million . Total shareholders' equity decreased$1.0 million to$96.4 million , or 1.00%, fromDecember 31, 2021 , due to normal retention of earnings, exercise of stock options, and stock-based compensation partially offset by changes in the fair value of AFS investments and payment of dividends. Book Value per common share decreased$0.29 to$18.32 atMarch 31, 2022 from$18.61 atDecember 31, 2021 . Tangible book value per common share, a non-GAAP measure, also decreased$0.29 to$18.18 atMarch 31, 2022 from$18.47 atDecember 31, 2021 .
The following is a reconciliations of book value to book value per common share and book value to tangible book value per common share for the periods indicated:
As Of
(in thousands, except share data) March 31, 2022 December 31, 2021
Book Value (GAAP) $ 96,431 $ 97,405
Book Value Attributable to Preferred Shares (1,204 ) (1,204 )
Book Value Attributable to Common Shares 95,227 96,201
Outstanding common shares 5,198,542 5,168,681
Book Value Per Common Share $ 18.32 $ 18.61
Book Value (GAAP) $ 96,431 $ 97,405
Book Value Attributable to Preferred Shares (1,204 ) (1,204 )
Book Value Attributable to Common Shares 95,227 96,201
Goodwill and intangibles (737 ) (737 )
Book Value Attributable to Common Shares (Tangible) $ 94,490 $ 95,464
Outstanding common shares 5,198,542 5,168,681
Tangible Book Value Per Common Share $ 18.18 $ 18.47
Cash and Cash Equivalents
Total cash and cash equivalents increased$35.1 million to$159.2 million atMarch 31, 2022 from$124.1 million atDecember 31, 2021 , primarily due to the increase in customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will continue to hold adequate levels of liquid and short-term assets.
Our investment securities portfolio is classified as AFS, which is carried at
fair value. The following table shows the amortized cost and fair value for our
AFS investment portfolio at the dates indicated (in thousands).
28
March 31, 2022 December 31, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. government agencies $ 27,449 $ 26,477 $ 9,479 $ 9,439
State and municipal obligations 25,971 24,267 26,011 26,677
Mortgage-backed securities - agency 31,594 30,166 33,191 33,418
Collateralized mortgage obligations -
agency 25,530 25,010 26,968 27,435
Asset-backed securities 2,451 2,418 2,599 2,590
Corporate bonds 14,950 14,829 12,200 12,403
$ 127,945 $ 123,167 $ 110,448 $ 111,962
AFS investment securities increased $11.2 million , or 10.01%, to $123.2 million
at March 31, 2022 from $112.0 million at December 31, 2021 . We continue to look
for opportunities to re-deploy funds from investment securities to higher
yielding loans.
The composition and maturities of the available-for-sale investment securities
portfolio at March 31, 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 was calculated using net income (interest accrual plus or minus
accretion/amortization) divided by ending book value.
More than one year More than five years
Less than one year through five years through ten years More than ten years Total securities
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
U.S. government agencies $ - - $ 17,970 0 $ 9,479 1.37 % $ - 0.00 % $ 27,449 1.47 %
State and municipal
obligations - - $ - - $ 7,387 1.99 % $ 18,584 2.26 % 25,971 2.19 %
Mortgage-backed
securities - agency - - 165 3.80 % 8,498 0.86 % 22,931 1.29 % 31,594 1.19 %
Collateralized mortgage
obligations - agency - - - - 12,241 1.96 % 13,289 0.20 % 25,530 1.05 %
Asset-backed securities - - - - 590 0.43 % 1,861 0.79 % 2,451 0.71 % Corporate bonds - - - - 14,200 3.98 % 750 4.92 % 14,950 4.03 % Total securities available-for-sale $ - 0.00 % $
18,135 1.55 %$ 52,395 2.21 %$ 57,415 1.38 %$ 127,945 1.75 % 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. 29 March 31, 2022 December 31, 2021 Balance Percent Balance Percent Real estate mortgage loans: One-to four-family residential$ 132,895 14.19$ 132,836 14.22 Commercial real estate 415,571 44.37 423,552 45.36 Home equity loans and lines of credit 20,155 2.15 21,568 2.31 Residential construction 37,260 3.98 38,881 4.16 Other construction and land 80,540 8.60 75,682 8.10 Commercial 243,860 26.04 234,355 25.09 Consumer 6,351 0.67 7,129 0.76 Loans receivable, gross 936,632 100.00 934,003 100.00 Net deferred loan costs (fees) (442 )
(528 )
Loans receivable, net of deferred fees$ 936,190 $
933,475
Commercial real estate loan balances contracted during the first quarter primarily due to significant paydowns of existing loans.
Included in commercial loans are PPP loans totaling
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'sCredit 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 one loan with a balance of$50 thousand that was more than 90 days past due and still accruing interest as ofMarch 31, 2022 that was not 98% guaranteed by the issuing agency. We had no loans 90 days or more past due that are still accruing interest as ofDecember 31, 2021 that are not 98% guaranteed by the issuing agency. 30 Delinquent loans 30-59 Days 60-89 Days 90 Days and over TotalMarch 31, 2022
One-to-four family residential $ - $
- $ 50$ 50 Commercial real estate 34 - - 34 Commercial - - 106 106 Consumer 54 - 267 321 Total delinquent loans$ 88 $ - $ 423$ 511 % of total loans, net 0.01 % 0.00 % 0.05 % 0.05 %December 31, 2021
One-to-four family residential $ - $
- $ 50$ 50 Commercial 54 - - 54 Consumer - - 590 590 Total delinquent loans$ 54 $ - $ 640$ 694
% of total loans, net of deferred fees and costs 0.01 % 0.00 %
0.07 % 0.07 %
Total delinquencies as a percentage of loans decreased from 0.07% at December
31, 2021 to 0.05% at March 31, 2022 . Delinquent loans decreased $0.2 million , or
26.37%, to $0.5 million at March 31, 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).
March 31, December 31,
2022 2021
Nonaccrual loans:
Real estate loans:
One-to-four family residential $ - $ 107
Commercial 132 767
Commercial 429 473
Consumer 15 2
Loans 90 days past due:
Real estate loans:
One-to-four family residential 50 -
Consumer 2 -
Total nonperforming loans 628 1,349
REO:
Other construction and land 842 842 Total foreclosed real estate 842 842 Total nonperforming assets$ 1,470 $ 2,191 TDRs still accruing$ 1,735 $ 1,780 Ratios: Nonperforming loans to total loans 0.07 % 0.14 % Nonperforming assets to total assets 0.12 % 0.18 % 31
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$200,000 are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and the ultimate collectability of all amounts contractually due is not in doubt. We may also remove a loan from TDR and impaired status if the loan is subsequently restructured and at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted to the borrower. Classification of Loans The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as "doubtful" or "loss" are charged off immediately (in thousands). March 31, December 31, 2022 2021 Classified loans: Substandard$ 3,879 $ 4,304 Doubtful - - Loss - - Total classified loans: 3,879 4,304 Special mention 7,219 9,647 Total criticized loans$ 11,098 $ 13,951
Total classified loans as a % of total loans, net 0.41 %
0.46 % Total criticized loans as a % of total loans, net 1.19 %
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. 32
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 0.58%.
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 ALL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast.
The following table summarizes the net charge-off detail as a percentage of average loans by loan composition for the periods indicated (in thousands).
Three Months Ended March 31,
2022 2021
Amount Percent Amount Percent
Real Estate:One-to-four family residential$ (2 ) 0.00 %$ 14 0.01 % Commercial real estate (52 ) -0.01 % - 0.00 % Home equity loans and lines of credit - 0.00 %
- 0.00 %
Residential construction - 0.00 % - 0.00 %
Other construction and land (19 ) -0.02 % - 0.00 %
Commercial 155 0.05 % (159 ) -0.06 %
Consumer - 0.00 % - 0.00 %
Total $ 82 $ (145 )
Ratios:
Net charge-offs to average loans
outstanding 0.01 % (0.02 )%
Allowance to nonperforming loans at
period end (1) 2,221.18 % 3,531.06 %
Allowance to total loans at period end 1.49 %
1.46 %
(1) At
loans and loans 90 days past due and still accruing.
33 Our allowance as a percentage of total loans increased to 1.49% atMarch 31, 2022 from 1.47% atDecember 31, 2021 , and 1.46% atMarch 31, 2021 , primarily as the result of loan growth in our more heavily reserved CarBucks segment. 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 2,221.18% atMarch 31, 2022 from 1,017.27% atDecember 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).
March 31, 2022 December 31, 2021
Balance Percent Balance Percent
Noninterest-bearing demand $ 283,685 25.6 $ 280,665 26.5
Interest-bearing demand 63,004 5.7 52,479 5.0
Money Market 547,207 49.3 500,862 47.3
Savings 17,003 1.5 16,106 1.5
Time Deposits 198,005 17.9 208,929 19.7
$ 1,108,904 100.0 $ 1,059,041 100.0
At March 31, 2022 and December 31, 2021 , we estimate that we have approximately
$440.1 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 $49.9
million , or 4.71%, for the three months ended March 31, 2022 compared to
December 31, 2021 . The increase in total deposits was mainly attributable to the
$46.3 million , or 9.25%, increase in money market accounts and $10.5 million , or
20.06%, increase in interest-bearing demand accounts, partially offset by a
$10.9 million , or 5.23%, decline in time deposits.
Discussion of Results of Operation
Comparison of the Three Months Ended
General Net income for the three months endedMarch 31, 2022 was$4.1 million , compared to$3.6 million for the same period in 2021. The increase in net income for the period was primarily the result of increases in net interest income and of$1.0 million , partially offset by an increase in noninterest expenses totaling$0.3 million . 34 Net Interest Income
Net interest income increased$1.0 million , or 8.10%, to$13.0 million for the three months endedMarch 31, 2022 , compared to$12.1 million for the same period in 2021. The increase in net interest income was primarily due to a higher volume in loans (bothCore Bank and CarBucks) and taxable investments, and decreases in costs on time deposits. This was partially offset by the decline in yields on ourCore Bank loans and taxable investments during the period. The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs that are amortized or accreted to interest income or expense. 35 For the Three Months Ended March 31, 2022 2021 Average Average Outstanding Outstanding Balance Interest Yield/ Rate Balance Interest Yield/ Rate (Dollars in thousands)
Interest-earning assets: Loans, Core Bank(1)$ 834,518 $ 8,275 4.02 %$ 807,600 $ 8,525 4.28 % Loans, Carbucks(2) 108,282 5,306 19.87 % 87,319 4,613 21.43 % Investments - taxable 107,903 466 1.75 % 101,326 268 1.07 %
Investments - tax exempt(3) 12,244 87 2.88 % 12,738 88 2.80 % Federal funds sold and other interest earning deposits 115,281 40 0.14 % 57,178 19 0.13 % Other investments, at cost 2,893 15 2.10 % 5,979 34 2.31 %
Total interest-earning assets 1,181,121 14,189 4.87 % 1,072,140 13,547 5.12 % Noninterest-earning assets 34,294
36,795
Total assets $ 1,215,415 $ 1,108,935
Interest-bearing liabilities:
Savings accounts $ 16,252 $ 4 0.10 % $ 10,877 $ 3 0.10 %
Time deposits 203,116 156 0.31 % 274,526 495 0.73 %
Money market accounts 519,485 503 0.39 % 400,168 452 0.46 %Interest bearing transaction accounts 52,573 24 0.19 % 63,962 43 0.27 % Total interest bearing deposits 791,426 687 0.35 % 749,533 993 0.54 % FHLB advances 5,000 5 0.41 % 16,000 35 0.88 % Junior subordinated debentures 35,876 433 4.89 % 35,757 433 4.91 % Other borrowings - - 0.00 % 151 - 0.96 % Total interest-bearing liabilities 832,302 1,125 0.55 % 801,441 1,461 0.74 % Noninterest-bearing deposits 278,227 215,073 Other non interest bearing liabilities 6,210
5,759
Total liabilities 1,116,739 1,022,273
Total equity 98,676 86,662
Total liabilities and equity$ 1,215,415 $ 1,108,935 Tax-equivalent net interest income$ 13,064 $ 12,086 Net interest-earning assets(4)$ 348,819 $ 270,699 Average interest-earning assets to interest-bearing liabilities 141.91 % 133.78 % Tax-equivalent net interest rate spread(5) 4.32 % 4.39 % Tax-equivalent net interest margin(6) 4.49 % 4.57 %
(1)
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
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.
36
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 March 31, 2022
Compared to the
Three Months Ended
Increase (decrease) due to:
(In thousands) Volume Rate Total
Interest-earning assets:
Loans - Core Bank (1) $ 278 $ (528 ) $ (250 )
Loans - CarBucks (1) 1,046 (353 ) 693
Investment - taxable 18 180 198Investments - tax exempt (2) (3 )
2 (1 )
Interest-earning deposits 20 1 21
Other investments, at cost (16 ) (3 ) (19 )Total interest-earning assets 1,343 (701 ) 642 Interest-bearing liabilities: Savings accounts 1 - 1 Time deposits (106 ) (233 ) (339 ) Money market accounts 122 (71 ) 51
Interest bearing transaction accounts (7 ) (12 ) (19 ) FHLB advances (17 ) (13 ) (30 ) Junior subordinated debentures - - - Other borrowings - - - Total interest-bearing liabilities (7 ) (329 ) (336 ) Change in tax-equivalent net interest income $ 1,350 $ (372 )$ 978
(1) Nonaccrual loans are included in the above analysis.
(2) Interest income on tax exempt loans and investments are adjusted for based on
a 21% federal tax rate.
Net interest income before provision for loan losses increased to $13.0 million
for the three months ended March 31, 2022 , compared to $12.1 million for the
same period in 2021, due to improvements in volume, partially offset by
unfavorable movements in interest rates.
The increase in tax-equivalent net interest income of $1.3 million related to
volume was primarily the result of higher average loan (both Core Bank and
CarBucks) which increased $47.9 million , and a $71.4 million decrease in average
time deposits for the three months ended March 31, 2022 compared to the same
period in 2021. The increase in average loan and taxable investment balances was
partially offset by increases of $119.3 million in money market balances.
The decrease in tax-equivalent net interest income of $0.4 million related to
rate was primarily the result of decreased costs on time deposits and decreased
yields on Core Bank and CarBucks loans.
Our tax-equivalent net interest margin was 4.49% for the three months ended
March 31, 2022 , compared to 4.57% for the same period in 2021, a decrease of
eight basis points. The decrease 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 Core
Bank and CarBucks loans.
Provision for Loan Losses
We recorded a provision for loan losses for the three months ended March 31,
2022 of $0.3 million due to organic loan growth and certain qualitative
adjustments in response to shifts in used car demand which could impact our
CarBucks portfolio. This compares to a $0.2 million provision for loan losses in
for the same period in 2021. We are experiencing continued stabilization in
asset quality, low charge-off amounts and a decline in the historical loss rates
used in our allowance for loan losses model. In light of ongoing supply chain
disruptions, labor shortages and the associated impact on monetary policy, there
is a risk that loss rates could increase.
37
Noninterest Income
The following table summarizes the components of noninterest income and the
corresponding changes between the three months ended March 31, 2022 and 2021 (in
thousands):
Three Months Ended March 31,
2022 2021 ChangeService charges on deposit accounts $ 334 $ 268$ 66 Bank owned life insurance 78 92 (14 ) Net gain on sale of premises and equipment 24
6 18
Other noninterest income 189 209 (20 )
Total noninterest income $ 625 $ 575 $ 50 Our noninterest income increased less than
Noninterest Expense
The following table summarizes the components of noninterest expense and the corresponding change between the three months endedMarch 31, 2022 and 2021
(in
thousands):
Three Months Ended March 31,
2022 2021 ChangeCompensation and employee benefits$ 5,537 $
5,074 $ 463
Net occupancy 586 564 22
Federal deposit insurance 116 153 (37 )
Professional and advisory 230 309 (79 )
Data processing 493 533 (40 )
Marketing and advertising 70 44 26Net cost of operation of real estate owned 23
110 (87 )
Other noninterest expense 929 880 49
Total noninterest expenses $ 7,984 $ 7,667 $ 317 Our noninterest expense increased$0.3 million to$8.0 million in the three months endedMarch 31, 2022 , compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of$0.5 million . This increase was partially offset by a$0.1 million decrease in the net cost of operation of real estate owned. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined with annual raises and increases in employee benefits, incentives and commissions. The decrease in the net cost of operation of real estate owned is primarily related to a decrease in writedowns of real estate owned. Income Taxes Income tax expense totaled$1.3 million for the three months endedMarch 31, 2022 , compared to$1.1 million for the same period in 2021. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.6% and 24.1% for the three months endedMarch 31, 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.
38 Discussion of Segment Results
See Note 9, "Reportable Segments" in notes to the consolidated financial statements included under Item 1 -"Financial Statements" for additional disclosures related to our reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the "Noninterest income" and "Noninterest expense" sections above.
Comparison of the Three Months Ended
As of and for the Three Months Ended March 31, 2022
Core Bank CarBucks Other Total
Interest income $ 8,329 $ 5,306 $ 536 $ 14,171
Interest expense 203 489 433 1,125
Net interest income 8,126 4,817 103 13,046
Provision for loan losses (324 ) 632 - 308
Noninterest income 482 64 79 625
Noninterest expense 5,289 2,679 16 7,984
Net income before taxes 3,643 1,570 166 5,379
Income tax expense 904 371 (4 ) 1,271
Net income $ 2,739 $ 1,199 $ 170 $ 4,108
Total assets $ 1,006,678 $ 108,229 $ 138,345 $ 1,253,252
As of and for the Three Months Ended March 31, 2021
Core Bank CarBucks Other Total
Interest income $ 8,577 $ 4,613 $ 339 $ 13,529
Interest expense 663 365 433 1,461
Net interest income 7,914 4,248 (94 ) 12,068
Provision for loan losses 523 (281 ) - 242
Noninterest income 447 37 91 575
Noninterest expense 5,217 2,435 15 7,667
Net income before taxes 2,621 2,131 (18 ) 4,734
Income tax expense 631 513 (4 ) 1,140
Net income $ 1,990 $ 1,618 $ (14 ) $ 3,594
Total assets $ 924,723 $ 78,756 $ 132,869 $ 1,136,348
Core Bank
Core Bank consists of commercial and consumer lending and full-service branches
in its geographic region with its own management team. The branches provide a
full range of traditional banking products as well as treasury services and
merchant services.
Core Bank net income increased $0.8 million to $2.7 million for the three months
ended March 31, 2022 compared to $2.0 million for the same period in 2021. Net
interest income increased $0.2 million to $8.1 million for the three months
ended March 31, 2022 from $7.9 million for the same period a year ago primarily
due to increased loan volume and reduced funding costs, partially offset by a
reduction in loan yield. Provision for loan losses decreased $0.8 million for
the three months ended March 31, 2022 compared to 2021 due to lower net charge
off activity and loan balance contraction during the first quarter of 2022 as
opposed to loan balance growth during the first quarter of 2021. Noninterest
expense increased $0.1 million to $5.3 million for the 2022 period compared to
$5.2 million for the same period in 2021 due primarily to an increase in
compensation and employee benefits expense in 2022.
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 the Company's Board approved underwriting guidelines.
Advances and repayments on credit lines averaging $0.1 million are vehicle
specific. The inventory typically consists of over 12,000 floored used vehicles
with an average price of $8,000 per unit, generally has an average 67-day
turnover, and generates approximately $300 in financing fees per vehicle which
is included in loan interest income.
39
CarBucks net income decreased $0.4 million to $1.2 million for the three months
ended March 31, 2022 compared to $1.6 million for the same three-month period in
2021. Net interest income increased $0.6 million to $4.8 million for the 2022
period from $4.2 million for the same period a year ago primarily due to
increased fees related to increases in inventory. Provision for loan losses
increased $0.9 million for the three months ended March 31, 2022 compared to
2021 due to increased net charge offs and higher loan balance, partially offset
by lower qualitative adjustments. Noninterest expense increased $0.2 million to
$2.7 million for the 2022 period compared to $2.4 million for the same period in
2021 due primarily to an increase in compensation and employee benefits expense
in 2022.
Other
Other includes parent company transactions, investment securities portfolio,
BOLI, excess death benefits, net intercompany eliminations, and certain other
activities not currently allocated to the aforementioned segments.
Other net income increased
Liquidity and Capital Resources
Liquidity and Market Risk. Our primary sources of funds consist of deposit inflows, loan repayments, advances from theFederal 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 ofMarch 31, 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 inFHLB andFederal Reserve Bank of Richmond ("FRB") interest-earning deposits and investment securities and are also used to pay off short-term borrowings. AtMarch 31, 2022 , cash and cash equivalents totaled$159.2 million . Included in this total was$131.6 million held at the FRB,$1.2 million held at the FHLB, and$21.8 million held at correspondent banks in interest-earning accounts. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources and uses of liquidity during the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Investing activities: Purchases of investments$ (20,730 ) $ (12,644 ) Maturities and principal repayments of investments 3,025 5,495 Net increase in loans (2,901 ) (11,289 ) Redemption of other investments, at cost 500 - Financing activities: Net increase in deposits$ 49,863 $ 44,077 Repurchase of common stock - (2,392 ) Dividends paid on common stock (672 ) - 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 three months
endedMarch 31, 2022 or 2021. 40
At
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 asMarch 31, 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 ofMarch 31, 2022 (in thousands): Total Used Unused Capacity Capacity Capacity
FHLB
Loan collateral capacity$ 356,037 Pledgeable marketable securities 122,667 FHLB totals 478,704$ 5,000 $ 473,704 Fed funds lines 49,000 - 49,000$ 527,704 $ 5,000 $ 522,704 Capital Resources. Shareholders' equity decreased$1.0 million to$96.4 million atMarch 31, 2022 compared to$97.4 million atDecember 31, 2021 . This decrease was primarily attributable to net income of$4.1 million , stock-based compensation of$0.1 million , and stock options exercised of$0.4 million offset by after-tax decreases in market value of AFS investment securities of$4.9 million and dividends declared of$0.7 million . 41 The tables below summarize the capital amounts and ratios of the Bank and the minimum regulatory requirements in accordance with Basel III and the prompt corrective action provisions atMarch 31, 2022 andDecember 31, 2021 (dollars in thousands). To Be Well-Capitalized Under Prompt For Capital Adequacy Corrective Actual Purposes (1) Action Provisions Amount Ratio Amount Ratio Amount Ratio As ofMarch 31, 2022 : Tier 1 Leverage Capital$ 127,808 10.52 %$ 48,575 >4.0 %$ 60,718 >5.0 % Common Equity Tier 1 Capital$ 127,808 12.59 %$ 71,073
>7.0 %$ 65,996 >6.5 % Tier 1 Risk-based Capital$ 127,808 12.59 %$ 86,303 >8.5 %$ 81,226 >8.0 % Total Risk-based Capital$ 140,515 13.84 %$ 106,609 >10.5 %$ 101,533 >10.0 % As ofDecember 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 atMarch 31, 2022 , andDecember 31, 2021 (in thousands). For Capital Adequacy Actual Purposes (2) Amount Ratio Amount Ratio As ofMarch 31, 2022 : Tier I Leverage Capital$ 107,676 8.86 %$ 48,587 >4.0 % Common Equity Tier 1 Capital$ 99,428 9.78 %$ 71,134 >7.0 % Tier I Risk-based Capital$ 107,676 10.60 %$ 86,378 >8.5 %Total Risk Based Capital $ 148,040 14.57 %$ 106,702 >10.5 % As ofDecember 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
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%.
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