CAUTION 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 operations
· statements regarding the quality of the assets 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 that could reduce
· Restrictions or conditions imposed by our regulators on our operations;
Increased competitive pressure in banking and financial services
Changes in access to finance or increased regulatory requirements for
· Changes in deposit flows;
Credit losses from declining real estate values, increased interest
interest rates, rising unemployment, changes in payment behavior or other factors;
· Credit losses due to loan concentration;
Changes in the amount of our loan portfolio secured 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 government initiatives affecting the financial services sector,
including as a result of presidential administration and democratic control
Changes in economic conditions in
local economies in which we operate, including but not limited to
due to the persistent negative impacts and disruptions resulting from the
COVID-19 outbreak on the economies and communities we serve, which may have
adversely impact our business, operations and performance, and could have a
negative impact on our credit portfolio, share price, borrowers and on the
the economy as a whole, both nationally and internationally;
· Changes in trading conditions and inflation;
Increased cybersecurity risk, including potential business interruptions or
· Changes in technology;
The adequacy of the level of our provision for loan losses and the amount of
loan loss provisions required in future periods;
Reviews by our regulatory authorities, including the possibility that the
regulatory authorities may, among other things, require us to increase our
provision for loan losses or impairment of assets;
· Changes in monetary and fiscal policies;
Risks associated with actual or potential litigation or investigations by
customers, regulators or others;
· The rate of unpaid debts and the amounts of credits written off;
The growth rate of loans in recent years and the lack of seasoning of part
our loan portfolio;
Our ability to maintain appropriate capital levels and comply with our
capital ratio requirements;
Adverse changes in asset quality and resulting losses and credit risk losses
· Changes in accounting policies, practices or guidelines;
The adverse effects of our suppliers’ failures to provide the agreed services within
in the manner and at the agreed cost; 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
trade) supply chain disruptions in transportation, war or terrorism
activities, critical utility outages or commercial disputes and tariffs.
For additional information about factors that could cause actual results to differ materially from the expectations set forth in the forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Form 10- K deposited 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 of
March 31, 2022have 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.
GrandSouth Bancorporation("we," "us," "our," or the "Company") was incorporated in 2000 under the laws of South Carolinaand 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 Delawarestatutory trust, formed to facilitate the issuance of trust preferred securities. The GrandSouth Trustis not consolidated in the Company's financial statements.
We provide a full range of financial services through offices located in
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 on the financial situation
Total assets increased
Total liabilities increased
$50.5 millionto $1.2 billionat March 31, 2022, or 4.57%, from December 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 millionto $96.4 million, or 1.00%, from December 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 $0.29to $18.32at March 31, 2022from $18.61at December 31, 2021. Tangible book value per common share, a non-GAAP measure, also decreased $0.29to $18.18at March 31, 2022from $18.47at December 31, 2021.
The following is a reconciliation 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 millionto $159.2 millionat March 31, 2022from $124.1 millionat December 31, 2021, primarily due to the increase in customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will continue to hold adequate levels of liquid and short-term assets.
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 $ 111,962AFS investment securities increased $11.2 million, or 10.01%, to $123.2 millionat March 31, 2022from $112.0 millionat 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, 2022are 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 $ - - $ 17,9700 $ 9,4791.37 % $ - 0.00 % $ 27,4491.47 % State and municipal obligations - - $ - - $ 7,3871.99 % $ 18,5842.26 % 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 %
$ 52,3952.21 % $ 57,4151.38 % $ 127,9451.75 % 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 $ 132,89514.19 $ 132,83614.22 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 )
Loans receivable, net of deferred fees
Commercial real estate loan balances contracted during the first quarter primarily due to large repayments of existing loans.
Commercial loans include PPP loans totaling
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 Administrationstaff 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 as part of a distressed debt restructuring (“TDR”), the loan is generally placed on non-recognition until there is a period of satisfactory payment performance by the lender. borrower (either immediately before or after the restructuring), generally six consecutive years. months, and the ultimate collection of all amounts contractually due is beyond doubt. For a discussion of TDRs, see the section entitled “Distressed 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 thousandthat was more than 90 days past due and still accruing interest as of March 31, 2022that was not 98% guaranteed by the issuing agency. We had no loans 90 days or more past due that are still accruing interest as of December 31, 2021that are not 98% guaranteed by the issuing agency. 30 Delinquent loans 30-59 Days 60-89 Days 90 Days and over Total March 31, 2022
One-to-four family residential $ - $
- $ 50
$ 50Commercial 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
$ 50Commercial 54 - - 54 Consumer - - 590 590 Total delinquent loans $ 54$ - $ 640 $ 694
% of total loans, net of fees and deferred charges 0.01% 0.00%
0.07 % 0.07 % Total delinquencies as a percentage of loans decreased from 0.07% at
December 31, 2021to 0.05% at March 31, 2022. Delinquent loans decreased $0.2 million, or 26.37%, to $0.5 millionat March 31, 2022from $0.7 millionat December 31, 2021. We continue to focus on collection efforts and favorable resolutions.
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
Other construction and land 842 842 Total foreclosed real estate 842 842 Total nonperforming assets
$ 1,470 $ 2,191TDRs still accruing $ 1,735 $ 1,780Ratios: 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
$200,000are 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 $ 4,304Doubtful - - Loss - - Total classified loans: 3,879 4,304 Special mention 7,219 9,647 Total criticized loans $ 11,098 $ 13,951
Total loans classified as % of total loans, net 0.41%
0.46 % Total criticized loans as a % of total loans, net 1.19 %
Management continues to dedicate resources to tracking and resolving classified and disputed 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
$200,000for 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 used in the base loss reserve based on trends in the following internal and external factors:
· Changes to loan policies and loan reviews;
Economic conditions – including unemployment rates, federal macroeconomic data,
housing prices and sales and regional economic outlook;
Changes in the nature and volume of the portfolio and in the conditions of
· Experience, capacity and depth of loan management;
· Volume and severity of delinquent, unexpired 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, laws and regulations
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 detail of net write-offs as a percentage of average loans by loan mix 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 % $ 140.01 % 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 %
loans and loans 90 days past due and still outstanding.
33 Our allowance as a percentage of total loans increased to 1.49% at
March 31, 2022from 1.47% at December 31, 2021, and 1.46% at March 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% at March 31, 2022from 1,017.27% at December 31, 2021primarily as the result of the decreased balance of nonperforming loans during the period.
The following table presents deposits by category and percentage of total deposits for the periods indicated (in thousands).
March 31, 2022 December 31, 2021 Balance Percent Balance Percent Noninterest-bearing demand
$ 283,68525.6 $ 280,66526.5 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 $ 1,108,904100.0 $ 1,059,041100.0 At March 31, 2022and December 31, 2021, we estimate that we have approximately $440.1 millionand $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 FDICfor 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, 2022compared 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 operating results
Comparison of the three months ended
General Net income for the three months ended
March 31, 2022was $4.1 million, compared to $3.6 millionfor 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 millionfor the three months ended March 31, 2022, compared to $12.1 millionfor the same period in 2021. The increase in net interest income was primarily due to a higher volume in loans (both Core Bankand CarBucks) and taxable investments, and decreases in costs on time deposits. This was partially offset by the decline in yields on our Core Bankloans 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 $ 8,2754.02 % $ 807,600 $ 8,5254.28 % 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 $ 1,108,935Interest-bearing liabilities: Savings accounts $ 16,252 $ 40.10 % $ 10,877 $ 30.10 % 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 $ 1,108,935Tax-equivalent net interest income $ 13,064 $ 12,086Net interest-earning assets(4) $ 348,819 $ 270,699Average 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 %
lending of goods and services to commercial and retail bank customers.
(2) Carbucks is the division of the bank that offers specialized floor plan loans to
small car dealerships in over 20 states.
(3) Tax-exempt investments are calculated taking into account a federal tax of 21%
(4) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(5) The tax-equivalent net interest rate difference represents the difference between the
tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(6) The net interest margin in tax equivalent represents the net interest in tax equivalent
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, 2022Compared to the
Three months completed
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 18 180 198
Investments - 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 )
(1) Unaccrued loans are included in the above analysis.
(2) Interest income on tax-exempt loans and investments is adjusted according to
a 21% federal tax rate. Net interest income before provision for loan losses increased to
$13.0 millionfor the three months ended March 31, 2022, compared to $12.1 millionfor 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 millionrelated to volume was primarily the result of higher average loan (both Core Bankand CarBucks) which increased $47.9 million, and a $71.4 milliondecrease in average time deposits for the three months ended March 31, 2022compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of $119.3 millionin money market balances. The decrease in tax-equivalent net interest income of $0.4 millionrelated to rate was primarily the result of decreased costs on time deposits and decreased yields on Core Bankand 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 Bankand CarBucks loans. Provision for Loan Losses We recorded a provision for loan losses for the three months ended March 31, 2022of $0.3 milliondue 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 millionprovision 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, 2022and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Change
Service charges on deposit accounts $ 334 $ 268
$ 66Bank 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
Our non-interest income grew less than
The following table summarizes the components of noninterest expense and the corresponding change between the three months ended
March 31, 2022and 2021
(in thousands): Three Months Ended March 31, 2022 2021 Change
Compensation and employee benefits
$ 463Net 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 26
Net 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 millionto $8.0 millionin the three months ended March 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 milliondecrease 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 millionfor the three months ended March 31, 2022, compared to $1.1 millionfor 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 ended March 31, 2022and 2021, respectively.
We continue to have unused net operating losses for state income tax purposes and no material current tax receivables or payables.
38 Discussion of Segment Results
See Note 9, “Reportable Segments” in the Notes to the Consolidated Financial Statements included in Section 1 – “Financial Statements” for additional information relating to our reportable segments. Fluctuations in non-interest income and non-interest expense incurred directly by the segments are discussed in more detail in the “Non-interest income” and “Non-interest 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 $ 14,171Interest 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 $ 4,108Total assets $ 1,006,678 $ 108,229 $ 138,345 $ 1,253,252As of and for the Three Months Ended March 31, 2021 Core Bank CarBucks Other Total Interest income $ 8,577 $ 4,613 $ 339 $ 13,529Interest 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 ) $ 3,594Total assets $ 924,723 $ 78,756 $ 132,869 $ 1,136,348Core Bank Core Bankconsists 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 Banknet income increased $0.8 millionto $2.7 millionfor the three months ended March 31, 2022compared to $2.0 millionfor the same period in 2021. Net interest income increased $0.2 millionto $8.1 millionfor the three months ended March 31, 2022from $7.9 millionfor 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 millionfor the three months ended March 31, 2022compared 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 millionto $5.3 millionfor the 2022 period compared to $5.2 millionfor 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 millionare vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of $8,000per unit, generally has an average 67-day turnover, and generates approximately $300in financing fees per vehicle which is included in loan interest income. 39 CarBucks net income decreased $0.4 millionto $1.2 millionfor the three months ended March 31, 2022compared to $1.6 millionfor the same three-month period in 2021. Net interest income increased $0.6 millionto $4.8 millionfor the 2022 period from $4.2 millionfor the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses increased $0.9 millionfor the three months ended March 31, 2022compared to 2021 due to increased net charge offs and higher loan balance, partially offset by lower qualitative adjustments. Noninterest expense increased $0.2 millionto $2.7 millionfor the 2022 period compared to $2.4 millionfor 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
Cash 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 March 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 in FHLBand Federal Reserve Bank of Richmond("FRB") interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At March 31, 2022, cash and cash equivalents totaled $159.2 million. Included in this total was $131.6 millionheld at the FRB, $1.2 millionheld at the FHLB, and $21.8 millionheld 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 ended March 31, 2022and 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 $ 44,077Repurchase 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
March 31, 2022or 2021. 40
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
March 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 of March 31, 2022(in thousands): Total Used Unused Capacity Capacity Capacity
Loan collateral capacity
$ 356,037Pledgeable marketable securities 122,667 FHLB totals 478,704 $ 5,000 $ 473,704Fed funds lines 49,000 - 49,000 $ 527,704 $ 5,000 $ 522,704Capital Resources. Shareholders' equity decreased $1.0 millionto $96.4 millionat March 31, 2022compared to $97.4 millionat December 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 millionoffset by after-tax decreases in market value of AFS investment securities of $4.9 millionand 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 at March 31, 2022and December 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 of March 31, 2022: Tier 1 Leverage Capital $ 127,80810.52 % $ 48,575>4.0 % $ 60,718>5.0 % Common Equity Tier 1 Capital $ 127,80812.59 % $ 71,073
$ 65,996>6.5 % Tier 1 Risk-based Capital $ 127,80812.59 % $ 86,303>8.5 % $ 81,226>8.0 % Total Risk-based Capital $ 140,51513.84 % $ 106,609>10.5 % $ 101,533>10.0 % As of December 31, 2021: Tier 1 Leverage Capital $ 123,34410.21 % $ 48,317>4.0 % $ 60,396>5.0 %
Common Equity Tier 1 Capital
$ 123,34412.24 % $ 70,517
$ 65,480>6.5 % Tier 1 Risk-based Capital $ 123,34412.24 % $ 85,628>8.5 % $ 80,591>8.0 % Total Risk-based Capital $ 135,95113.50 % $ 105,776>10.5 % $ 100,739>10.0 %
1) Includes a 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
March 31, 2022, and December 31, 2021(in thousands). For Capital Adequacy Actual Purposes (2) Amount Ratio Amount Ratio As of March 31, 2022: Tier I Leverage Capital $ 107,6768.86 % $ 48,587>4.0 % Common Equity Tier 1 Capital $ 99,4289.78 % $ 71,134>7.0 % Tier I Risk-based Capital $ 107,67610.60 % $ 86,378>8.5 % Total Risk Based Capital $ 148,04014.57 % $ 106,702>10.5 % As of December 31, 2021: Tier I Leverage Capital $ 103,7308.59 % $ 48,327>4.0 % Common Equity Tier 1 Capital $ 95,4829.47 % $ 70,574>7.0 % Tier I Risk-based Capital $ 103,73010.29 % $ 85,696>8.5 % Total Risk Based Capital $ 143,96314.28 % $ 105,860>10.5 %
(1) Under the
The company is not subject to minimum capital adequacy and capital
conservation reserve capital requirements at the holding company level, unless
otherwise advised by the FRB (these capital requirements are only applicable
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 for monitoring purposes.
(2) Includes a capital conservation buffer of 2.50%.
© Edgar Online, source