UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly
Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
June 30, 2021
Commission File Number: 000-31937
Grandsouth Bancorporation
(Exact name of registrant as specified in its charter)
| South Carolina | 57-1104394 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| 381 Halton Road, | |
| Greenville, South Carolina | 29607 |
| (Address of principal executive offices) | (Zip Code) |
(864) 770-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated Filer x | Smaller reporting company x | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, no par value | GRRB | The OTC Market Group’s QTCQX |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On August 7, 2021, 5,140,681 shares of the issuer’s common stock (no par value), were issued and outstanding.
1
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
FORM
10-Q
TABLE OF CONTENTS
2
| Item 1. Financial Statements |
| GRANDSOUTH BANCORPORATION AND SUBSIDIARY |
| Consolidated Balance Sheets |
| (Unaudited) | (Audited) | |||||||
| June 30, | December 31, | |||||||
| (in thousands, except share data) | 2021 | 2020 | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | 2,829 | $ | 6,216 | ||||
| Interest-earning deposits | 82,600 | 51,137 | ||||||
| Federal funds sold | 1,010 | 5,672 | ||||||
| Cash and cash equivalents | 86,439 | 63,025 | ||||||
| Investments - available for sale | 131,576 | 110,707 | ||||||
| Other investments, at cost | 4,226 | 6,252 | ||||||
| Loans receivable, net of deferred fees and costs | 909,016 | 878,545 | ||||||
| Allowance for loan losses | (13,325 | ) | (12,572 | ) | ||||
| Premises and equipment, net | 16,961 | 16,680 | ||||||
| Other real estate owned | 1,845 | 1,932 | ||||||
| Accrued interest receivable | 5,495 | 5,704 | ||||||
| Bank owned life insurance | 14,610 | 14,861 | ||||||
| Net deferred tax asset | 2,696 | 2,501 | ||||||
| Goodwill | 737 | 737 | ||||||
| Other assets | 3,195 | 1,407 | ||||||
| Total assets | $ | 1,163,471 | $ | 1,089,779 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 252,050 | $ | 203,502 | ||||
| Interest-bearing | 764,332 | 742,978 | ||||||
| Total deposits | 1,016,382 | 946,480 | ||||||
| Federal Home Loan Bank advances | 16,000 | 16,000 | ||||||
| Junior subordinated notes | 35,804 | 35,744 | ||||||
| Accrued interest payable | 272 | 336 | ||||||
| Accrued expenses and other liabilities | 5,526 | 4,694 | ||||||
| Total liabilities | 1,073,984 | 1,003,254 | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Shareholders’ Equity: | ||||||||
| Preferred stock - no par; 20,000,000 authorized; Series A; 287,895 shares issued and outstanding | — | — | ||||||
| Common stock - no par value; 20,000,000 shares authorized; 5,127,681 and 5,271,971 shares issued and outstanding | — | — | ||||||
| Additional paid in capital | 43,852 | 46,645 | ||||||
| Retained earnings | 44,181 | 37,721 | ||||||
| Accumulated other comprehensive income | 1,454 | 2,159 | ||||||
| Total shareholders’ equity | 89,487 | 86,525 | ||||||
| Total liabilities and shareholders’ equity | $ | 1,163,471 | $ | 1,089,779 | ||||
| The accompanying notes are an integral part of the consolidated financial statements. |
3
| GRANDSOUTH BANCORPORATION AND SUBSIDIARY |
| Consolidated Statements of Income (Unaudited) |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest income: | ||||||||||||||||
| Interest and fees on loans | $ | 12,909 | $ | 11,314 | $ | 26,047 | $ | 24,410 | ||||||||
| Taxable securities | 358 | 284 | 626 | 654 | ||||||||||||
| Tax-exempt securities | 70 | 43 | 140 | 60 | ||||||||||||
| Interest-earning deposits | 23 | 16 | 42 | 89 | ||||||||||||
| Other | 31 | 69 | 65 | 129 | ||||||||||||
| Total interest income | 13,391 | 11,726 | 26,920 | 25,342 | ||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | 803 | 1,979 | 1,796 | 4,714 | ||||||||||||
| Federal Home Loan Bank advances | 36 | 48 | 71 | 81 | ||||||||||||
| Junior subordinated notes | 432 | 236 | 865 | 486 | ||||||||||||
| Other borrowings | — | — | — | 5 | ||||||||||||
| Total interest expense | 1,271 | 2,263 | 2,732 | 5,286 | ||||||||||||
| Net interest income | 12,120 | 9,463 | 24,188 | 20,056 | ||||||||||||
| Provision for loan losses | 309 | 656 | 551 | 1,739 | ||||||||||||
| Net interest income after provision for loan losses | 11,811 | 8,807 | 23,637 | 18,317 | ||||||||||||
| Noninterest income: | ||||||||||||||||
| Service charges on deposit accounts | 322 | 221 | 590 | 456 | ||||||||||||
| Gain on sale of investment securities available for sale | — | 392 | — | 392 | ||||||||||||
| Bank owned life insurance | 85 | 103 | 177 | 204 | ||||||||||||
| Net gain on sale of premises and equipment | 78 | 8 | 84 | 8 | ||||||||||||
| Other | 283 | 170 | 492 | 338 | ||||||||||||
| Total noninterest income | 768 | 894 | 1,343 | 1,398 | ||||||||||||
| Noninterest expenses: | ||||||||||||||||
| Compensation and employee benefits | 4,987 | 5,044 | 10,061 | 10,200 | ||||||||||||
| Net occupancy | 584 | 531 | 1,148 | 1,085 | ||||||||||||
| Federal deposit insurance | 172 | 100 | 325 | 231 | ||||||||||||
| Professional and advisory | 265 | 362 | 574 | 634 | ||||||||||||
| Data processing | 494 | 394 | 1,027 | 844 | ||||||||||||
| Marketing and advertising | 35 | 28 | 79 | 86 | ||||||||||||
| Net cost of operation of other real estate owned | 19 | 258 | 129 | 273 | ||||||||||||
| Other | 847 | 817 | 1,727 | 1,676 | ||||||||||||
| Total noninterest expenses | 7,403 | 7,534 | 15,070 | 15,029 | ||||||||||||
| Income before taxes | 5,176 | 2,167 | 9,910 | 4,686 | ||||||||||||
| Income tax expense | 1,213 | 532 | 2,353 | 1,139 | ||||||||||||
| Net income | 3,963 | 1,635 | 7,557 | 3,547 | ||||||||||||
| Preferred stock dividends | (30 | ) | (24 | ) | (60 | ) | (48 | ) | ||||||||
| Net income applicable to common shareholders | $ | 3,933 | $ | 1,611 | $ | 7,497 | $ | 3,499 | ||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.73 | $ | 0.30 | $ | 1.38 | $ | 0.64 | ||||||||
| Diluted | $ | 0.71 | $ | 0.29 | $ | 1.36 | $ | 0.64 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 5,134,112 | 5,201,951 | 5,167,763 | 5,208,275 | ||||||||||||
| Diluted | 5,259,588 | 5,258,363 | 5,254,908 | 5,276,435 | ||||||||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
4
| GRANDSOUTH BANCORPORATION AND SUBSIDIARY |
| Consolidated Statements of Comprehensive Income (Unaudited) |
| Three Months Ended June 30, | Six months ended June 30, | |||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net income | $ | 3,963 | $ | 1,635 | $ | 7,557 | $ | 3,547 | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in unrealized holding gains (losses) on securities available for sale | 1,095 | 598 | (901 | ) | 1,957 | |||||||||||
| Reclassification adjustment for securities gains realized in net income | — | (392 | ) | — | (392 | ) | ||||||||||
| Other comprehensive income (loss), before tax | 1,095 | 206 | (901 | ) | 1,565 | |||||||||||
| Income tax effect related to items of other comprehensive income (loss) | (238 | ) | (48 | ) | 196 | (364 | ) | |||||||||
| Other comprehensive income (loss), after tax | 857 | 158 | (705 | ) | 1,201 | |||||||||||
| Comprehensive income | $ | 4,820 | $ | 1,793 | $ | 6,852 | $ | 4,748 | ||||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
5
| GRANDSOUTH BANCORPORATION AND SUBSIDIARY |
| Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) |
| Accumulated Other | ||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional | Retained | Comprehensive | ||||||||||||||||||||||||||||
| (in thousands, except share and per share data) | Shares | Amount | Shares | Amount | Paid in Capital | Earnings | Income | Total | ||||||||||||||||||||||||
| Balances at December 31, 2020 | 5,271,971 | $ | — | 287,895 | $ | — | $ | 46,645 | $ | 37,721 | $ | 2,159 | $ | 86,525 | ||||||||||||||||||
| Net income | — | — | — | — | — | 3,594 | — | 3,594 | ||||||||||||||||||||||||
| Other comprehensive loss , net of tax | — | — | — | — | — | — | (1,562 | ) | (1,562 | ) | ||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | 155 | — | — | 155 | ||||||||||||||||||||||||
| Stock options exercised | 36,656 | — | — | — | 460 | — | — | 460 | ||||||||||||||||||||||||
| Stock repurchase | (135,230 | ) | — | — | — | (2,392 | ) | — | — | (2,392 | ) | |||||||||||||||||||||
| Common stock dividend ($0.10 per share) | — | — | — | — | — | (527 | ) | — | (527 | ) | ||||||||||||||||||||||
| Preferred stock dividend ($0.105 per share) | — | — | — | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||||||
| Balances at March 31, 2021 | 5,173,397 | — | 287,895 | — | 44,868 | 40,758 | 597 | 86,223 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 3,963 | — | 3,963 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 857 | 857 | ||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | 153 | — | — | 153 | ||||||||||||||||||||||||
| Stock options exercised | 29,500 | — | — | — | 385 | — | — | 385 | ||||||||||||||||||||||||
| Stock repurchase | (75,216 | ) | — | — | — | (1,554 | ) | — | — | (1,554 | ) | |||||||||||||||||||||
| Common stock dividend ($0.08 per share) | — | — | — | — | — | (510 | ) | — | (510 | ) | ||||||||||||||||||||||
| Preferred stock dividend ($0.084 per share) | — | — | — | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||||||
| Balances at June 30, 2021 | 5,127,681 | $ | — | 287,895 | $ | — | $ | 43,852 | $ | 44,181 | $ | 1,454 | $ | 89,487 | ||||||||||||||||||
| Accumulated Other | ||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional | Retained | Comprehensive | ||||||||||||||||||||||||||||
| (in thousands, except share and per share data) | Shares | Amount | Shares | Amount | Paid in Capital | Earnings | Income | Total | ||||||||||||||||||||||||
| Balance at December 31, 2019 | 5,201,951 | $ | — | 287,895 | $ | — | $ | 45,625 | $ | 30,841 | $ | 184 | $ | 76,650 | ||||||||||||||||||
| Net income | — | — | — | — | — | 1,912 | — | 1,912 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 1,043 | 1,043 | ||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | 213 | — | — | 213 | ||||||||||||||||||||||||
| Stock options exercised | 8,580 | — | — | — | 48 | — | — | 48 | ||||||||||||||||||||||||
| Common stock dividend ($0.08 per share) | — | — | — | — | — | (416 | ) | — | (416 | ) | ||||||||||||||||||||||
| Preferred stock dividend ($0.084 per share) | — | — | — | — | — | (24 | ) | — | (24 | ) | ||||||||||||||||||||||
| Balance at March 31, 2020 | 5,210,531 | — | 287,895 | — | 45,886 | 32,313 | 1,227 | 79,426 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 1,635 | — | 1,635 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 158 | 158 | ||||||||||||||||||||||||
| Stock compensation expense | — | — | — | 200 | — | — | 200 | |||||||||||||||||||||||||
| Common stock dividend ($0.08 per share) | — | — | — | — | — | (417 | ) | — | (417 | ) | ||||||||||||||||||||||
| Preferred stock dividend ($0.084 per share) | — | — | — | — | — | (24 | ) | — | (24 | ) | ||||||||||||||||||||||
| Balance at June 30, 2020 | 5,210,531 | $ | — | 287,895 | $ | — | $ | 46,086 | $ | 33,507 | $ | 1,385 | $ | 80,978 | ||||||||||||||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
6
| GRANDSOUTH BANCORPORATION AND SUBSIDIARY |
| Consolidated Statements of Cash Flows (Unaudited) |
| For the six months ended June 30, | ||||||||
| (in thousands) | 2021 | 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 7,557 | $ | 3,547 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation, amortization and accretion | 722 | 229 | ||||||
| Investment amortization, net | 678 | 378 | ||||||
| Provision for loan losses | 551 | 1,739 | ||||||
| Provision for other real estate owned | 87 | 242 | ||||||
| Stock-based compensation expense | 308 | 413 | ||||||
| Income on bank owned life insurance, net | (177 | ) | (204 | ) | ||||
| Gain on sale of investment securities available for sale | — | (392 | ) | |||||
| Gain on sale of fixed assets | (84 | ) | (8 | ) | ||||
| Net change in operating assets and liabilities: | ||||||||
| Accrued interest receivable | 209 | 95 | ||||||
| Other assets | (1,788 | ) | 295 | |||||
| Accrued interest payable | (64 | ) | (136 | ) | ||||
| Other liabilities | 832 | 955 | ||||||
| Net cash provided by operating activities | 8,831 | 7,153 | ||||||
| Cash flows from investing activities: | ||||||||
| Activity for investment securities available for sale: | ||||||||
| Purchases | (37,013 | ) | (52,684 | ) | ||||
| Maturities/calls and principal repayments | 14,565 | 6,761 | ||||||
| Sales | — | 18,787 | ||||||
| Net increase in loans | (30,489 | ) | (41,342 | ) | ||||
| Redemption of BOLI policies | 429 | — | ||||||
| Proceeds from sale of fixed assets | 87 | 37 | ||||||
| Purchase of fixed assets | (726 | ) | (398 | ) | ||||
| Redemption of other investments, at cost | 2,026 | 691 | ||||||
| Net cash provided used in investing activities | (51,121 | ) | (68,148 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net increase in deposits | 69,902 | 54,436 | ||||||
| Net increase in other borrowings | — | 1,076 | ||||||
| Repurchase of common stock | (3,946 | ) | — | |||||
| Proceeds from FHLB advances | — | 20,000 | ||||||
| Cash received upon exercise of stock options | 845 | 48 | ||||||
| Dividends paid on common stock | (1,037 | ) | (833 | ) | ||||
| Dividends paid on preferred stock | (60 | ) | (48 | ) | ||||
| Net cash provided by financing activities | 65,704 | 74,679 | ||||||
| Net change in cash and cash equivalents | 23,414 | 13,684 | ||||||
| Cash and cash equivalents, beginning of period | 63,025 | 42,779 | ||||||
| Cash and cash equivalents, end of period | $ | 86,439 | $ | 56,463 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest on deposits and other borrowings | $ | 2,730 | $ | 5,421 | ||||
| Income taxes | 3,072 | 88 | ||||||
| Significant noncash investing activities: | ||||||||
| Real estate acquired in satisfaction of mortgage loans | $ | — | $ | 513 | ||||
| The accompanying notes are an integral part of the consolidated financial statements. |
7
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
| NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION |
Organization
GrandSouth Bancorporation (“we,” “us,” “our,” or the “Company”) was incorporated on September 7, 2000 for the purpose of becoming the holding company for GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to the Plan of Exchange, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company. The Company’s primary operation is its investment in the Bank. The Company also owns 100% of the common stock of GrandSouth Capital Trust I (the “Trust”), a Delaware statutory trust formed in 2006 to facilitate the issuance of trust preferred securities.
The Bank is a South Carolina state-chartered commercial bank that provides a full range of banking services. The Bank is insured and subject to the regulation of the Federal Deposit Insurance Corporation (“FDIC”) and is also subject to the regulation of the South Carolina State Board of Financial Institutions.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Bank. The accounts of the Trust are not consolidated with the Company. In consolidation all significant intercompany accounts and transactions have been eliminated.
Business Segments
Accounting Standards Codification (“ASC”) Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s two reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. Please refer to “Note 9 – Reportable Segments” for further information on the reporting for the Company’s two business segments.
Estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of deferred tax assets.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Form 10 for the year ended December 31, 2020, filed with the SEC on March 30, 2021 (the “2020 Form 10”). In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
Reclassification
Certain amounts in the prior year’s financial statements may have been reclassified to conform to the current year’s presentation. The reclassifications had no effect on our results of operations or financial condition as previously reported.
Recent Accounting Standards Updates
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update eliminates Step 2 from the goodwill impairment test, which required an entity to calculate the implied fair value of goodwill by valuing a reporting unit’s assets and liabilities using the same process that would be required to value assets and liabilities in a business combination. Instead, the amendments require that an entity perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company adopted this update as of January 1, 2020, with no material impact on the consolidated financial statements.
8
In September 2016, the FASB issued amendments to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in the update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected thereby providing financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by the reporting entity. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. The Company has formed a cross-functional committee to provide corporate governance over the implementation of this update, has evaluated data sources and made process updates to capture additional relevant data, has identified a service provider to perform the calculation, and continues to attend seminars and forums specific to this update. The Company also engaged the service provider to assist with the implementation of the standard. While we continue to evaluate the impact the new guidance will have on our financial position and results of operations, we currently expect the new guidance may result in an increase to our allowance for credit losses given the change to estimated losses over the contractual life of the loan portfolio. The amount of any change to our allowance will depend, in part, upon the composition of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act included a number of provisions that were applicable to the Company, including the following:
| ○ | Accounting relief for troubled debt restructures (“TDRs”): The CARES Act provided that modifications under certain forbearance conditions for loans that were not more than 30 days past due at December 31, 2020 will not be considered TDRs for regulatory reporting and GAAP. |
| ○ | Paycheck Protection Program (“PPP”): The CARES Act created the PPP through the Small Business Administration (“SBA”), which allowed the Company to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls or restores payrolls afterwards. |
| NOTE 2. INVESTMENTS |
The amortized cost and estimated fair values of available-for-sale (“AFS”) securities as of June 30, 2021 and December 31, 2020 are summarized as follows (in thousands):
Schedule of Securities Available-For-Sale
| June 30, 2021 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. government agencies | $ | 7,467 | $ | 42 | $ | (26 | ) | $ | 7,483 | |||||||
| State and municipal obligations | 19,931 | 1,045 | (195 | ) | 20,781 | |||||||||||
| Mortgage-backed securities - agency | 41,553 | 483 | (186 | ) | 41,850 | |||||||||||
| Collateralized mortgage obligations - agency | 50,586 | 843 | (292 | ) | 51,137 | |||||||||||
| Asset-backed securities | 2,732 | — | (11 | ) | 2,721 | |||||||||||
| Corporate bonds | 7,450 | 243 | (89 | ) | 7,604 | |||||||||||
| Total | $ | 129,719 | $ | 2,656 | $ | (799 | ) | $ | 131,576 | |||||||
9
| December 31, 2020 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| State and municipal obligations | $ | 16,684 | $ | 1,136 | $ | — | $ | 17,820 | ||||||||
| Mortgage-backed securities - agency | 31,056 | 463 | (32 | ) | 31,487 | |||||||||||
| Collateralized mortgage obligations - agency | 49,441 | 1,194 | (75 | ) | 50,560 | |||||||||||
| Asset-backed securities | 6,268 | 5 | (38 | ) | 6,235 | |||||||||||
| Corporate bonds | 4,500 | 127 | (22 | ) | 4,605 | |||||||||||
| Total | $ | 107,949 | $ | 2,925 | $ | (167 | ) | $ | 110,707 | |||||||
Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):
Schedule of Securities Available-For-Sale, Unrealized Loss
| June 30, 2021 | ||||||||||||||||||||||||
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||||||
| Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
|||||||||||||||||||
| U.S. government agencies | $ | 1,458 | $ | 26 | $ | — | $ | — | $ | 1,458 | $ | 26 | ||||||||||||
| State and municipal obligations | 3,622 | 195 | — | — | 3,622 | 195 | ||||||||||||||||||
| Mortgage-backed securities - agency | 20,997 | 186 | — | — | 20,997 | 186 | ||||||||||||||||||
| Collateralized mortgage obligations - agency | 11,543 | 145 | 9,826 | 147 | 21,369 | 292 | ||||||||||||||||||
| Asset-backed securities | — | — | 2,721 | 11 | 2,721 | 11 | ||||||||||||||||||
| Corporate bonds | 2,860 | 89 | — | — | 2,860 | 89 | ||||||||||||||||||
| Total | $ | 40,480 | $ | 641 | $ | 12,547 | $ | 158 | $ | 53,027 | $ | 799 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||||||
| Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
|||||||||||||||||||
| Mortgage-backed securities - agency | $ | 6,223 | $ | 32 | $ | — | $ | — | $ | 6,223 | $ | 32 | ||||||||||||
| Collateralized mortgage obligations - agency | 20,673 | 75 | — | — | 20,673 | 75 | ||||||||||||||||||
| Asset-backed securities | — | — | 2,808 | 38 | 2,808 | 38 | ||||||||||||||||||
| Corporate bonds | 1,478 | 22 | — | — | 1,478 | 22 | ||||||||||||||||||
| Total | $ | 28,374 | $ | 129 | $ | 2,808 | $ | 38 | $ | 31,182 | $ | 167 | ||||||||||||
10
Information pertaining to the number of securities with gross unrealized losses is detailed in the table below:
Schedule of Number of Securities Available-For-Sale, Unrealized Loss
| June 30, 2021 | ||||||||||||
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||
| U.S. government agencies | 1 | — | 1 | |||||||||
| State and municipal obligations | 3 | — | 3 | |||||||||
| Mortgage-backed securities - agency | 6 | — | 6 | |||||||||
| Collateralized mortgage obligations - agency | 4 | 3 | 7 | |||||||||
| Asset-backed securities | — | 2 | 2 | |||||||||
| Corporate bonds | 7 | — | 7 | |||||||||
| 21 | 5 | 26 | ||||||||||
Management of the Company believes all unrealized losses as of June 30, 2021 and December 31, 2020 represent temporary impairment. The unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.
Schedule of Realized Gain Loss
| Three Months Ended | Six Months Ended | |||||||
| June 30, 2020 | June 30, 2020 | |||||||
| AFS | ||||||||
| Gross proceeds | $ | 18,787 | $ | 18,787 | ||||
| Gross realized gains | 392 | 392 | ||||||
There were no AFS investment security sales for the three or six months ended June 30, 2021.
The amortized cost and estimated fair value of AFS investments in debt securities at June 30, 2021, by contractual maturity, are shown below (in thousands).
Schedule of Securities Available-For-Sale by Contractual Maturity
| June 30, 2021 | ||||||||
| Amortized Cost | Fair Value | |||||||
| Over 5 years through 10 years | $ | 14,410 | $ | 14,691 | ||||
| Over 10 years | 20,438 | 21,177 | ||||||
| Total securites other than asset-backed and mortgage-backed securities | 34,848 | 35,868 | ||||||
| Mortgage-backed securities | 41,553 | 41,850 | ||||||
| Collaterized mortgage obigations | 50,586 | 51,137 | ||||||
| Asset-backed securities | 2,732 | 2,721 | ||||||
| Total | $ | 129,719 | $ | 131,576 | ||||
Expected maturities may differ from contractual maturities when issuers and borrowers have the right to call or prepay the obligations.
There were no AFS securities pledged against deposits and borrowings at June 30, 2021 or at December 31, 2020.
11
Other investments are comprised of the following and are recorded at cost which approximates fair value (in thousands):
Schedule of Other Investment
| June 30, 2021 | December 31, 2020 | |||||||
| Federal Home Loan Bank stock | $ | 1,225 | $ | 1,501 | ||||
| Investment in Trust Preferred Securities | 247 | 247 | ||||||
| Certificates of deposit | 2,254 | 4,004 | ||||||
| Other investments | 500 | 500 | ||||||
| Total other investments, at cost | $ | 4,226 | $ | 6,252 | ||||
Certificates of deposit totaling $1.2 million and $0.8 million were pledged against customer deposits at June 30, 2021, and December 31, 2020, respectively. Federal Home Loan Bank of Atlanta (“FHLB”) stock is used to collateralize advances with the FHLB.
NOTE 3. LOANS RECEIVABLE
Loans receivable are summarized in the table below as of the dates indicated (in thousands):
Schedule of Loans Receivable
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Real estate loans: | ||||||||
| One-to-four family residential | $ | 117,323 | $ | 114,119 | ||||
| Commercial real estate | 405,341 | 369,706 | ||||||
| Home equity loans and lines of credit | 19,046 | 17,174 | ||||||
| Residential construction | 33,533 | 30,989 | ||||||
| Other construction and land | 70,447 | 68,611 | ||||||
| Total real estate loans | 645,690 | 600,599 | ||||||
| Commercial | 230,494 | 243,617 | ||||||
| Consumer | 33,817 | 35,362 | ||||||
| Total commercial and consumer | 264,311 | 278,979 | ||||||
| Loans receivable, gross | 910,001 | 879,578 | ||||||
| Net deferred loan fees | (909 | ) | (956 | ) | ||||
| Unaccreted discount | (261 | ) | (274 | ) | ||||
| Unamortized premium | 185 | 197 | ||||||
| Loans receivable, net of deferred fees and costs | $ | 909,016 | $ | 878,545 | ||||
Commercial loans includes PPP loans with recorded investments of $12.5 million and $22.5 million as of June 30, 2021 and December 31, 2020, respectively. Net deferred fee income recognized on PPP loans in the six months ended June 30, 2021 totaled $0.6 million and is included in loan interest income with $0.5 million remaining to be recognized in future periods.
The Bank had $46.6 million and $41.1 million of loans pledged as collateral to secure funding with the FHLB at June 30, 2021 and December 31, 2020, respectively.
12
NOTE 4. ALLOWANCE FOR LOAN LOSSES
The changes in the allowance for loan losses by portfolio segment are presented in the following tables for the periods indicated (in thousands):
Schedule of Allowance for Loan Losses by Portfolio Segment
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| One-to-four Family | Commercial | Home Equity and | Residential | Construction | ||||||||||||||||||||||||||||
| Residential | Real Estate | Lines of Credit | Construction | and Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| Beginning balance | $ | 1,270 | $ | 4,411 | $ | 207 | $ | 320 | $ | 918 | $ | 5,615 | $ | 218 | $ | 12,959 | ||||||||||||||||
| Provision | (47 | ) | 303 | 19 | 52 | (158 | ) | 99 | 41 | 309 | ||||||||||||||||||||||
| Charge-offs | 1 | — | — | — | — | (98 | ) | — | (97 | ) | ||||||||||||||||||||||
| Recoveries | 3 | — | — | — | 17 | 134 | — | 154 | ||||||||||||||||||||||||
| Ending balance | $ | 1,227 | $ | 4,714 | $ | 226 | $ | 372 | $ | 777 | $ | 5,750 | $ | 259 | $ | 13,325 | ||||||||||||||||
| Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| One-to-four Family | Commercial | Home Equity and | Residential | Construction | ||||||||||||||||||||||||||||
| Residential | Real Estate | Lines of Credit | Construction | and Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| Beginning balance | $ | 1,234 | $ | 3,701 | $ | 220 | $ | 123 | $ | 575 | $ | 4,930 | $ | 173 | $ | 10,956 | ||||||||||||||||
| Provision | 87 | 240 | 17 | 88 | 135 | 139 | (50 | ) | 656 | |||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | (651 | ) | — | (651 | ) | ||||||||||||||||||||||
| Recoveries | 2 | — | — | — | — | 382 | 24 | 408 | ||||||||||||||||||||||||
| Ending balance | $ | 1,323 | $ | 3,941 | $ | 237 | $ | 211 | $ | 710 | $ | 4,800 | $ | 147 | $ | 11,369 | ||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| One-to-four Family | Commercial | Home Equity and | Residential | Construction | ||||||||||||||||||||||||||||
| Residential | Real Estate | Lines of Credit | Construction | and Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| Beginning balance | $ | 1,297 | $ | 4,559 | $ | 231 | $ | 389 | $ | 843 | $ | 5,118 | $ | 135 | $ | 12,572 | ||||||||||||||||
| Provision | (60 | ) | 155 | (5 | ) | (17 | ) | (83 | ) | 437 | 124 | 551 | ||||||||||||||||||||
| Charge-offs | (29 | ) | — | — | — | — | (204 | ) | — | (233 | ) | |||||||||||||||||||||
| Recoveries | 19 | — | — | — | 17 | 399 | — | 435 | ||||||||||||||||||||||||
| Ending balance | $ | 1,227 | $ | 4,714 | $ | 226 | $ | 372 | $ | 777 | $ | 5,750 | $ | 259 | $ | 13,325 | ||||||||||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| One-to-four Family | Commercial | Home Equity and | Residential | Construction | ||||||||||||||||||||||||||||
| Residential | Real Estate | Lines of Credit | Construction | and Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| Beginning balance | $ | 1,098 | $ | 3,122 | $ | 188 | $ | 84 | $ | 584 | $ | 5,024 | $ | 187 | $ | 10,287 | ||||||||||||||||
| Provision | 223 | 819 | 49 | 127 | 126 | 433 | (38 | ) | 1,739 | |||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | (1,211 | ) | (26 | ) | (1,237 | ) | |||||||||||||||||||||
| Recoveries | 2 | — | — | — | — | 554 | 24 | 580 | ||||||||||||||||||||||||
| Ending balance | $ | 1,323 | $ | 3,941 | $ | 237 | $ | 211 | $ | 710 | $ | 4,800 | $ | 147 | $ | 11,369 | ||||||||||||||||
13
The allocation of the allowance for loan losses and the recorded investment in loans is presented in the following tables by portfolio segment and reserving methodology as of the dates indicated (in thousands):
| June 30, 2021 | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| One-to-four Family | Commercial | Home Equity and | Residential | Construction | ||||||||||||||||||||||||||||
| Residential | Real Estate | Lines of Credit | Construction | and Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 22 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 22 | ||||||||||||||||||
| Collectively evaluated for impairment | 1,205 | 4,714 | 226 | 372 | 777 | 5,750 | 259 | 13,303 | ||||||||||||||||||||||||
| Ending Balance | $ | 1,227 | $ | 4,714 | $ | 226 | $ | 372 | $ | 777 | $ | 5,750 | $ | 259 | $ | 13,325 | ||||||||||||||||
| Loans Receivable | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 635 | $ | 1,526 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,161 | ||||||||||||||||
| Collectively evaluated for impairment | 116,515 | 403,168 | 19,088 | 33,347 | 70,175 | 230,702 | 33,860 | 906,855 | ||||||||||||||||||||||||
| Loans and Leases Receivable, Gross | $ | 117,150 | $ | 404,694 | $ | 19,088 | $ | 33,347 | $ | 70,175 | $ | 230,702 | $ | 33,860 | $ | 909,016 | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| One-to-four Family | Commercial | Home Equity and | Residential | Construction | ||||||||||||||||||||||||||||
| Residential | Real Estate | Lines of Credit | Construction | and Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | — | $ | 1 | ||||||||||||||||
| Collectively evaluated for impairment | 1,297 | 4,559 | 231 | 389 | 843 | 5,117 | 135 | 12,571 | ||||||||||||||||||||||||
| $ | 1,297 | $ | 4,559 | $ | 231 | $ | 389 | $ | 843 | $ | 5,118 | $ | 135 | $ | 12,572 | |||||||||||||||||
| Loans Receivable | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 281 | $ | 987 | $ | — | $ | — | $ | 126 | $ | 320 | $ | 66 | $ | 1,780 | ||||||||||||||||
| Collectively evaluated for impairment | 113,658 | 368,149 | 17,213 | 30,838 | 68,160 | 243,401 | 35,346 | 876,765 | ||||||||||||||||||||||||
| Loans and Leases Receivable, Gross | $ | 113,939 | $ | 369,136 | $ | 17,213 | $ | 30,838 | $ | 68,286 | $ | 243,721 | $ | 35,412 | $ | 878,545 | ||||||||||||||||
Portfolio Quality Indicators
The Company’s loan portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.
The Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:
| ● | Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated. |
| ● | Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted. This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral. |
| ● | Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms. |
| ● | Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable. |
| ● | Loss (9) – Collectability is unlikely resulting in immediate charge-off. |
14
Description of Segment and Class Risks
Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.
One-to-four family residential
We centrally underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. We also evaluate the value and marketability of the collateral. Common risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.
Commercial real estate
Commercial mortgage loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates.
Home equity and lines of credit
Home equity loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines of credit in excess of the collateral value if there have been significant declines since origination.
Residential construction and other construction and land
Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial construction and land development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.
15
Commercial
We centrally underwrite each of our commercial loans, which includes agricultural loans and specialty floor-plan lending, based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses, including the experience and background of the principals of such businesses. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral. Common risks to specialty floor-plan lending includes adverse conditions in the automobile market and risks associated with declining values. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.
Consumer
The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since the date of loan origination in excess of principal repayment.
The recorded investment in loans by portfolio segment and loan grade is presented in the following tables as of the dates indicated (in thousands):
Schedule of Loans by Portfolio and Grade
| June 30, 2021 | |||||||||||||||||||||||||||||||||
| One-to-Four | Home Equity | Other | |||||||||||||||||||||||||||||||
| Loan | Family | Commercial | and Lines of | Residential | Construction and | ||||||||||||||||||||||||||||
| Grade | Residential | Real Estate | Credit | Construction | Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| 1 | $ | 569 | $ | 1,472 | $ | — | $ | — | $ | 222 | $ | 1,513 | $ | 27,299 | $ | 31,075 | |||||||||||||||||
| 2 | — | 257 | — | — | — | 1,566 | 2 | 1,825 | |||||||||||||||||||||||||
| 3 | 9,674 | 51,152 | 2,919 | — | 12,004 | 12,317 | 107 | 88,173 | |||||||||||||||||||||||||
| 4 | 94,302 | 299,477 | 14,124 | 30,023 | 45,440 | 109,532 | 5,028 | 597,926 | |||||||||||||||||||||||||
| 5 | 9,925 | 44,302 | 1,909 | 3,324 | 12,493 | 104,254 | 1,302 | 177,509 | |||||||||||||||||||||||||
| 6 | 1,563 | 6,346 | 58 | — | 16 | 1,093 | 47 | 9,123 | |||||||||||||||||||||||||
| 7 | 1,117 | 1,688 | 78 | — | — | 427 | 75 | 3,385 | |||||||||||||||||||||||||
| Total | $ | 117,150 | $ | 404,694 | $ | 19,088 | $ | 33,347 | $ | 70,175 | $ | 230,702 | $ | 33,860 | $ | 909,016 | |||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||
| One-to-Four | Home Equity | Other | |||||||||||||||||||||||||||||||
| Loan | Family | Commercial | and Lines of | Residential | Construction and | ||||||||||||||||||||||||||||
| Grade | Residential | Real Estate | Credit | Construction | Land | Commercial | Consumer | Total | |||||||||||||||||||||||||
| 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 432 | $ | 168 | $ | 600 | |||||||||||||||||
| 2 | — | 269 | — | — | — | 984 | 21 | 1,274 | |||||||||||||||||||||||||
| 3 | 10,946 | 50,287 | 834 | 190 | 17,202 | 21,624 | 304 | 101,387 | |||||||||||||||||||||||||
| 4 | 92,055 | 281,473 | 14,363 | 25,359 | 38,869 | 124,579 | 33,671 | 610,369 | |||||||||||||||||||||||||
| 5 | 8,898 | 29,716 | 1,856 | 5,289 | 12,074 | 94,496 | 1,108 | 153,437 | |||||||||||||||||||||||||
| 6 | 1,231 | 5,453 | 9 | — | — | 1,030 | 54 | 7,777 | |||||||||||||||||||||||||
| 7 | 809 | 1,938 | 151 | — | 141 | 576 | 86 | 3,701 | |||||||||||||||||||||||||
| Total | $ | 113,939 | $ | 369,136 | $ | 17,213 | $ | 30,838 | $ | 68,286 | $ | 243,721 | $ | 35,412 | $ | 878,545 | |||||||||||||||||
16
Delinquency Analysis of Loans by Class
An aging analysis of the recorded investment of loans by portfolio segment, including loans on nonaccrual status as well as accruing TDRs and purchased student loans for which there is a 98% guarantee, is presented in the following tables as of the dates indicated (in thousands).
Schedule of Loans by Portfolio Segment, including Loans on Nonaccrual Status
| June 30, 2021 | ||||||||||||||||||||||||
| 30-59 Days Past | 60-89 Days Past | 90 Days and Over | Total Loans | |||||||||||||||||||||
| Due | Due | Past Due | Total Past Due | Current | Receivable | |||||||||||||||||||
| One-to-four family residential | $ | — | $ | — | $ | — | $ | — | $ | 117,150 | $ | 117,150 | ||||||||||||
| Commercial real estate | — | — | — | — | 404,694 | 404,694 | ||||||||||||||||||
| Home equity and lines of credit | — | — | — | — | 19,088 | 19,088 | ||||||||||||||||||
| Residential construction | — | — | — | — | 33,347 | 33,347 | ||||||||||||||||||
| Other construction and land | — | — | — | — | 70,175 | 70,175 | ||||||||||||||||||
| Commercial | 3 | — | — | 3 | 230,699 | 230,702 | ||||||||||||||||||
| Consumer | 890 | 551 | 2,450 | 3,891 | 29,969 | 33,860 | ||||||||||||||||||
| Total | $ | 893 | $ | 551 | $ | 2,450 | $ | 3,894 | $ | 905,122 | $ | 909,016 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| 30-59 Days Past | 60-89 Days Past | 90 Days and Over | Total Loans | |||||||||||||||||||||
| Due | Due | Past Due | Total Past Due | Current | Receivable | |||||||||||||||||||
| One-to-four family residential | $ | — | $ | — | $ | 15 | $ | 15 | $ | 113,924 | $ | 113,939 | ||||||||||||
| Commercial real estate | — | — | — | — | 369,136 | 369,136 | ||||||||||||||||||
| Home equity and lines of credit | — | — | — | — | 17,213 | 17,213 | ||||||||||||||||||
| Residential construction | — | — | — | — | 30,838 | 30,838 | ||||||||||||||||||
| Other construction and land | — | — | — | — | 68,286 | 68,286 | ||||||||||||||||||
| Commercial | 6 | — | 2 | 8 | 243,713 | 243,721 | ||||||||||||||||||
| Consumer | 1,840 | 727 | 2,549 | 5,116 | 30,296 | 35,412 | ||||||||||||||||||
| Total | $ | 1,846 | $ | 727 | $ | 2,566 | $ | 5,139 | $ | 873,406 | $ | 878,545 | ||||||||||||
17
Impaired Loans
The following table presents recorded investments in loans considered to be impaired and related information on those impaired loans as of June 30, 2021 and December 31, 2020 (in thousands).
Schedule of Impaired Loans
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Unpaid Principal | Specific | Unpaid Principal | Specific | |||||||||||||||||||||
| Recorded Balance | Balance | Allowance | Recorded Balance | Balance | Allowance | |||||||||||||||||||
| Loans without a valuation allowance | ||||||||||||||||||||||||
| One-to-four family residential | $ | 281 | $ | 281 | $ | — | $ | 281 | $ | 352 | $ | — | ||||||||||||
| Commercial real estate | 1,526 | 1,526 | — | 987 | 994 | — | ||||||||||||||||||
| Other construction and land | — | — | — | 126 | 152 | — | ||||||||||||||||||
| Commercial | — | — | — | 308 | 434 | — | ||||||||||||||||||
| Consumer | — | — | — | 66 | 68 | — | ||||||||||||||||||
| 1,807 | 1,807 | — | 1,768 | 2,000 | — | |||||||||||||||||||
| Loans with a valuation allowance | ||||||||||||||||||||||||
| One-to-four family residential | 354 | 354 | 22 | — | — | — | ||||||||||||||||||
| Commercial | — | — | — | 12 | 12 | 1 | ||||||||||||||||||
| 354 | 354 | 22 | 12 | 12 | 1 | |||||||||||||||||||
| Total | ||||||||||||||||||||||||
| One-to-four family residential | 635 | 635 | 22 | 281 | 352 | — | ||||||||||||||||||
| Commercial real estate | 1,526 | 1,526 | — | 987 | 994 | — | ||||||||||||||||||
| Other construction and land | — | — | — | 126 | 152 | — | ||||||||||||||||||
| Commercial | — | — | — | 320 | 446 | 1 | ||||||||||||||||||
| Consumer | — | — | — | 66 | 68 | — | ||||||||||||||||||
| $ | 2,161 | $ | 2,161 | $ | 22 | $ | 1,780 | $ | 2,012 | $ | 1 | |||||||||||||
The average recorded investment in impaired loans by portfolio segment and interest income recognized on those impaired loans is presented in the following table for the periods indicated (in thousands):
| Three Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||
| Investment in | Income | Investment in | Income | |||||||||||||
| Impaired Loans | Recognized | Impaired Loans | Recognized | |||||||||||||
| Loans without a valuation allowance | ||||||||||||||||
| One-to-four family residential | $ | 282 | $ | 3 | $ | 359 | $ | — | ||||||||
| Commercial real estate | 1,542 | 18 | 4,611 | 20 | ||||||||||||
| Other construction and land | — | — | 157 | 2 | ||||||||||||
| Commercial | — | — | 587 | — | ||||||||||||
| Consumer | — | — | 84 | — | ||||||||||||
| 1,824 | 21 | 5,798 | 22 | |||||||||||||
| Loans with a valuation allowance | ||||||||||||||||
| One-to-four family residential | 356 | 3 | — | — | ||||||||||||
| Commercial real estate | — | — | — | — | ||||||||||||
| Other construction and land | — | — | — | — | ||||||||||||
| Commercial | — | — | 353 | 2 | ||||||||||||
| Consumer | — | — | 15 | — | ||||||||||||
| 356 | 3 | 368 | 2 | |||||||||||||
| Total | ||||||||||||||||
| One-to-four family residential | 638 | 6 | 359 | — | ||||||||||||
| Commercial real estate | 1,542 | 18 | 4,611 | 20 | ||||||||||||
| Other construction and land | — | — | 157 | 2 | ||||||||||||
| Commercial | — | — | 940 | 2 | ||||||||||||
| Consumer | — | — | 99 | — | ||||||||||||
| $ | 2,180 | $ | 24 | $ | 6,166 | $ | 24 | |||||||||
18
| Six Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||
| Investment in | Income | Investment in | Income | |||||||||||||
| Impaired Loans | Recognized | Impaired Loans | Recognized | |||||||||||||
| Loans without a valuation allowance | ||||||||||||||||
| One-to-four family residential | $ | 283 | $ | 6 | $ | — | $ | 5 | ||||||||
| Commercial real estate | 1,562 | 40 | — | 24 | ||||||||||||
| Other construction and land | — | — | — | — | ||||||||||||
| Commercial | — | — | 388 | 2 | ||||||||||||
| Consumer | — | — | 15 | 1 | ||||||||||||
| 1,845 | 46 | 403 | 32 | |||||||||||||
| Loans with a valuation allowance | ||||||||||||||||
| One-to-four family residential | 357 | 6 | 361 | 5 | ||||||||||||
| Commercial real estate | — | — | 4,634 | 44 | ||||||||||||
| Other construction and land | — | — | 158 | 2 | ||||||||||||
| Commercial | — | — | 611 | 2 | ||||||||||||
| Consumer | — | — | 85 | 1 | ||||||||||||
| 357 | 6 | 5,849 | 54 | |||||||||||||
| Total | ||||||||||||||||
| One-to-four family residential | 640 | 12 | 361 | 10 | ||||||||||||
| Commercial real estate | 1,562 | 40 | 4,634 | 68 | ||||||||||||
| Other construction and land | — | — | 158 | 2 | ||||||||||||
| Commercial | — | — | 999 | 4 | ||||||||||||
| Consumer | — | — | 100 | 2 | ||||||||||||
| $ | 2,202 | $ | 52 | $ | 6,252 | $ | 86 | |||||||||
Nonperforming Loans
The recorded investment of nonperforming loans by portfolio segment is presented in the table below as of the dates indicated (in thousands):
Schedule of Non-Performaing Loans
| June 30, 2021 | December 31, 2020 | |||||||
| One-to-four family residential | $ | 22 | $ | 39 | ||||
| Commercial real estate | 29 | 31 | ||||||
| Other construction and land | — | 126 | ||||||
| Commercial | 166 | 324 | ||||||
| Consumer | 6 | 13 | ||||||
| Non-performing loans | $ | 223 | $ | 533 | ||||
19
TDRs
The recorded investment in performing and nonperforming TDRs by portfolio segment is presented in the tables below as of the dates indicated (in thousands):
Schedule of TDR
| June 30, 2021 | |||||||||||||
| Performing | Nonperforming | Total | |||||||||||
| TDRs | TDRs | TDRs | |||||||||||
| TDR Loan | One-to-four family residential | $ | 589 | $ | 22 | $ | 611 | ||||||
| Commercial real estate | 910 | — | 910 | ||||||||||
| Other construction and land | — | — | — | ||||||||||
| Commercial | 7 | 126 | 133 | ||||||||||
| Consumer | 48 | 6 | 54 | ||||||||||
| $ | 1,554 | $ | 154 | $ | 1,708 | ||||||||
| December 31, 2020 | |||||||||||||
| Performing | Nonperforming | Total | |||||||||||
| TDRs | TDRs | TDRs | |||||||||||
| One-to-four family residential | $ | 241 | $ | 40 | $ | 281 | |||||||
| Commercial real estate | 956 | — | 956 | ||||||||||
| Other construction and land | — | 126 | 126 | ||||||||||
| Commercial | — | 132 | 132 | ||||||||||
| Consumer | 57 | 10 | 67 | ||||||||||
| $ | 1,254 | $ | 308 | $ | 1,562 | ||||||||
Loan modifications that were deemed TDRs at the time of the modification are presented in the table below for the periods indicated (in thousands):
| Number of TDR | Pre-Modification | Post-Modification | ||||||||||
| Modification Type | Loans | Recorded Investment | Recorded Investment | |||||||||
| Three months ended June 30, 2020 | ||||||||||||
| Extended payment terms | 2 | $ | 149 | $ | 148 | |||||||
There were no loan modifications deem TDRs for the three months ended June 30, 2021.
| Number of TDR | Pre-Modification | Post-Modification | ||||||||||
| Modification Type | Loans | Recorded Investment | Recorded Investment | |||||||||
| Six months ended June 30, 2021 | ||||||||||||
| Interest rate concession | 1 | $ | 357 | $ | 357 | |||||||
| Six months ended June 30, 2020 | ||||||||||||
| Extended payment terms | 3 | $ | 173 | $ | 172 | |||||||
There were no TDRs that defaulted during the three or six month period ending June 30, 2021 or 2020 and which were modified as TDRs within the previous 12 months.
20
NOTE 5. DEPOSITS
Deposit balances and interest expense by type of deposit are summarized as follows as of and for the periods indicated (in thousands):
Schedule of Deposits
| As of and for the | As of and for the Year Ended | |||||||||||||||||||||||
| Six Months Ended June 30, | December 31, | |||||||||||||||||||||||
| 2021 | 2020 | 2020 | ||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||
| Balance | Expense | Balance | Expense | Balance | Expense | |||||||||||||||||||
| Noninterest-bearing demand | $ | 252,050 | $ | — | $ | 190,672 | $ | — | $ | 203,502 | $ | — | ||||||||||||
| Interest-bearing demand | 72,236 | 84 | 37,786 | 21 | 63,614 | 75 | ||||||||||||||||||
| Money Market | 440,716 | 915 | 299,216 | 1,052 | 384,838 | 1,915 | ||||||||||||||||||
| Savings | 13,038 | 6 | 8,211 | 4 | 10,584 | 8 | ||||||||||||||||||
| Time Deposits | 238,342 | 791 | 332,200 | 3,637 | 283,942 | 5,416 | ||||||||||||||||||
| Total deposits | $ | 1,016,382 | $ | 1,796 | $ | 868,085 | $ | 4,714 | $ | 946,480 | $ | 7,414 | ||||||||||||
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we make various commitments and incur certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At June 30, 2021, commitments to extend credit and standby letters of credit totaled $294.8 million. We do not anticipate any material losses as a result of these transactions.
In the normal course of business, the Company is periodically involved in litigation and other matters. In the opinion of the Company’s management, none of the litigation and other matters are expected to have a material adverse effect on the accompanying consolidated financial statements.
NOTE 7. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock as of the dates indicated (in thousands, except per share data):
Schedule of Earning per Share
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income | $ | 3,963 | $ | 1,635 | $ | 7,557 | $ | 3,547 | ||||||||
| Less: Preferred stock dividends | (30 | ) | (24 | ) | (60 | ) | (48 | ) | ||||||||
| Net income applicable to common equity | 3,933 | 1,611 | 7,497 | 3,499 | ||||||||||||
| Undistributed earnings allocated to participating securities | (190 | ) | (65 | ) | (357 | ) | (146 | ) | ||||||||
| Net income applicable to common stockholders | $ | 3,743 | $ | 1,546 | $ | 7,140 | $ | 3,353 | ||||||||
| Denominator: | ||||||||||||||||
| Basic - Total weighted-average basic shares outstandings | 5,134,112 | 5,201,951 | 5,167,763 | 5,208,275 | ||||||||||||
| Stock options | 125,476 | 56,412 | 87,145 | 68,160 | ||||||||||||
| Diluted - Total weighted-average diluted shares outstanding | 5,259,588 | 5,258,363 | 5,254,908 | 5,276,435 | ||||||||||||
| Basic income per share | $ | 0.73 | $ | 0.30 | $ | 1.38 | $ | 0.64 | ||||||||
| Diluted income per share | $ | 0.71 | $ | 0.29 | $ | 1.36 | $ | 0.64 | ||||||||
The Company excluded 102,500 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $24.20 from the computation of diluted earnings per share for the three and six months ended June 30, 2021 because of their antidilutive effect.
The Company excluded 556,000 and 471,000 potentially dilutive shares of common stock issuable upon exercise of stock options with weighted average exercise prices of $16.04 and $16.44 from the computation of diluted earnings per share for the three and six months ended June 30, 2020, respectively, because of their antidilutive effect.
21
NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income and changes in those components are presented in the tables below as of and for the years indicated (in thousands).
Schedule of Changes in Accumulated Other Comprehensive Income
| Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||||||||||
| AFS Securities | Total | AFS Securities | Total | |||||||||||||
| Balance, beginning of period | $ | 597 | $ | 597 | $ | 2,159 | $ | 2,159 | ||||||||
| Change in net unrealized holding gains on AFS securities | 1,095 | 1,095 | (901 | ) | (901 | ) | ||||||||||
| Income tax effect | (238 | ) | (238 | ) | 196 | 196 | ||||||||||
| Balance, end of period | $ | 1,454 | $ | 1,454 | $ | 1,454 | $ | 1,454 | ||||||||
| Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||||||||||||
| AFS Securities | Total | AFS Securities | Total | |||||||||||||
| Balance, beginning of period | $ | 1,227 | $ | 1,227 | $ | 184 | $ | 184 | ||||||||
| Change in net unrealized holding losses on AFS securities | 598 | 598 | 1,957 | 1,957 | ||||||||||||
| Reclassification adjustment for securities gains realized in net income | (392 | ) | (392 | ) | (392 | ) | (392 | ) | ||||||||
| Income tax effect | (48 | ) | (48 | ) | (364 | ) | (364 | ) | ||||||||
| Balance, end of period | $ | 1,385 | $ | 1,385 | $ | 1,385 | $ | 1,385 | ||||||||
There were no AFS securities sold during the three or six months ended June 30, 2021.
NOTE 9. REPORTABLE SEGMENTS
Grandsouth’s banking segment Grandsouth Bank conducts traditional banking operations (as Grandsouth Bank, or Core Bank) and offers specialty lending (as Carbucks). The Core Bank and Carbucks are Grandsouth’s primary reportable segments for management financial reporting. This business segment structure along primary lending products is consistent with the way management internally reviews financial information and allocates resources. Results for prior periods have been restated for comparability.
Segment information is shown in the tables below as of and for the periods indicated (in thousands).
Schedule of Reportable Segment
| As of and for the Three Months Ended June 30, 2021 | As of and for the Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
| Core Bank | Carbucks | Other | Total | Core Bank | Carbucks | Other | Total | |||||||||||||||||||||||||
| Interest income | $ | 8,449 | $ | 4,512 | $ | 430 | $ | 13,391 | $ | 7,861 | $ | 3,534 | $ | 331 | $ | 11,726 | ||||||||||||||||
| Interest expense | 499 | 340 | 432 | 1,271 | 1,700 | 327 | 236 | 2,263 | ||||||||||||||||||||||||
| Net interest income | 7,950 | 4,172 | (2 | ) | 12,120 | 6,161 | 3,207 | 95 | 9,463 | |||||||||||||||||||||||
| Provision for loan losses | 68 | 241 | — | 309 | 698 | (42 | ) | — | 656 | |||||||||||||||||||||||
| Noninterest income | 577 | 38 | 153 | 768 | 271 | 127 | 496 | 894 | ||||||||||||||||||||||||
| Noninterest expense | 4,941 | 2,440 | 22 | 7,403 | 5,200 | 2,315 | 19 | 7,534 | ||||||||||||||||||||||||
| Net income before taxes | 3,518 | 1,529 | 129 | 5,176 | 534 | 1,061 | 572 | 2,167 | ||||||||||||||||||||||||
| Income tax expense | 826 | 356 | 31 | 1,213 | 132 | 261 | 139 | 532 | ||||||||||||||||||||||||
| Net income | $ | 2,692 | $ | 1,173 | $ | 98 | $ | 3,963 | $ | 402 | $ | 800 | $ | 433 | $ | 1,635 | ||||||||||||||||
| . | ||||||||||||||||||||||||||||||||
| Total loans, net of deferred fees and costs | $ | 821,535 | $ | 87,481 | $ | — | $ | 909,016 | $ | 736,487 | $ | 60,245 | $ | — | $ | 796,732 | ||||||||||||||||
| Total assets | $ | 930,199 | $ | 86,833 | $ | 146,439 | $ | 1,163,471 | $ | 815,737 | $ | 60,234 | $ | 117,500 | $ | 993,471 | ||||||||||||||||
22
| As of and for the Six Months Ended June 30, 2021 | As of and for the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
| Core Bank | Carbucks | Other | Total | Core Bank | Carbucks | Other | Total | |||||||||||||||||||||||||
| Interest income | $ | 17,026 | $ | 9,125 | $ | 769 | $ | 26,920 | $ | 15,901 | $ | 8,723 | $ | 718 | $ | 25,342 | ||||||||||||||||
| Interest expense | 1,162 | 705 | 865 | 2,732 | 3,742 | 1,058 | 486 | 5,286 | ||||||||||||||||||||||||
| Net interest income | 15,864 | 8,420 | (96 | ) | 24,188 | 12,159 | 7,665 | 232 | 20,056 | |||||||||||||||||||||||
| Provision for loan losses | 591 | (40 | ) | — | 551 | 1,602 | 137 | — | 1,739 | |||||||||||||||||||||||
| Noninterest income | 1,024 | 75 | 244 | 1,343 | 528 | 274 | 596 | 1,398 | ||||||||||||||||||||||||
| Noninterest expense | 10,158 | 4,875 | 37 | 15,070 | 9,850 | 5,148 | 31 | 15,029 | ||||||||||||||||||||||||
| Net income before taxes | 6,139 | 3,660 | 111 | 9,910 | 1,235 | 2,654 | 797 | 4,686 | ||||||||||||||||||||||||
| Income tax expense | 1,457 | 869 | 27 | 2,353 | 301 | 646 | 192 | 1,139 | ||||||||||||||||||||||||
| Net income | $ | 4,682 | $ | 2,791 | $ | 84 | $ | 7,557 | $ | 934 | $ | 2,008 | $ | 605 | $ | 3,547 | ||||||||||||||||
| . | ||||||||||||||||||||||||||||||||
| Total loans, net of deferred fees and costs | $ | 821,535 | $ | 87,481 | $ | — | $ | 909,016 | $ | 736,487 | $ | 60,245 | $ | — | $ | 796,732 | ||||||||||||||||
| Total assets | $ | 930,199 | $ | 86,833 | $ | 146,439 | $ | 1,163,471 | $ | 815,737 | $ | 60,234 | $ | 117,500 | $ | 993,471 | ||||||||||||||||
Core Bank – The bank’s primary business is to provide traditional deposit and lending products and services to commercial and retail banking clients.
Carbucks – The banking division that provides specialty floor plan lending to small automobile dealers in over 20 states.
Other – Includes AFS securities portfolio, BOLI, parent company activities, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.
NOTE 10. FAIR VALUE DISCLOSURES
Overview
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).
Fair Value Hierarchy
Level 1 - Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.
Level 3 - Valuation is generated from techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s valuation process.
23
Financial Assets and Financial Liabilities Measured on a Recurring Basis
The Company uses the following methods and assumptions in estimating the fair value of its financial assets and financial liabilities on a recurring basis:
Investment Securities Available-for-Sale
We obtain fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.
Also included in securities are corporate bonds which are valued using significant unobservable inputs and are classified as Level 2 or Level 3 based on market information available during the period.
Financial assets measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):
Schedule of Financial Assets Measured at Fair Value on Recurring Basis
| June 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| U.S. government agencies | $ | — | $ | 7,483 | $ | — | $ | 7,483 | ||||||||
| State and municipal obligations | — | 20,781 | — | 20,781 | ||||||||||||
| Mortgage-backed securities - agency | — | 41,850 | — | 41,850 | ||||||||||||
| Collateralized mortgage obligations - agency | — | 51,137 | — | 51,137 | ||||||||||||
| Asset-backed securities | — | 2,721 | — | 2,721 | ||||||||||||
| Corporate bonds | — | — | 7,604 | 7,604 | ||||||||||||
| Total recurring assets at fair value | $ | — | $ | 123,972 | $ | 7,604 | $ | 131,576 | ||||||||
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| State and municipal obligations | $ | — | $ | 17,820 | $ | — | $ | 17,820 | ||||||||
| Mortgage-backed securities - agency | — | 31,487 | — | 31,487 | ||||||||||||
| Collateralized mortgage obligations - agency | — | 50,560 | — | 50,560 | ||||||||||||
| Asset-backed securities | — | 6,235 | — | 6,235 | ||||||||||||
| Corporate bonds | — | — | 4,605 | 4,605 | ||||||||||||
| Total recurring assets at fair value | $ | — | $ | 106,102 | $ | 4,605 | $ | 110,707 | ||||||||
There were no financial liabilities measured at fair value on a recurring basis as of June 30, 2021, or December 31, 2020.
24
The changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are presented in the following table for the years indicated (in thousands):
Schedule of Changes in Assets Measured at Fair Value on Recurring Basis
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance at beginning of period | $ | 5,093 | $ | 500 | $ | 4,605 | $ | — | ||||||||
| Corporate bond additions | 2,450 | — | 2,950 | 500 | ||||||||||||
| Corporate bond fair value adjustments | 61 | — | 49 | — | ||||||||||||
| Balance at end of period | $ | 7,604 | $ | 500 | $ | 7,604 | $ | 500 | ||||||||
Financial Assets Measured on a Nonrecurring Basis
The Company uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:
Impaired Loans
Impaired loans are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured using the present value of expected future cash flows are not deemed to be measured at fair value.
REO
REO obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. REO carried at fair value is classified as Level 3.
25
Nonfinancial assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):
Schedule of NonFinancial Assets Measured at Fair Value on NonRecurring Basis
| June 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Real estate owned: | ||||||||||||||||
| Commercial real estate | $ | — | $ | — | $ | 451 | $ | 451 | ||||||||
| Other construction and land | — | — | 1,394 | 1,394 | ||||||||||||
| Total | $ | — | $ | — | $ | 1,845 | $ | 1,845 | ||||||||
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Collateral dependent impaired loans: | ||||||||||||||||
| One-to four family residential | $ | — | $ | — | $ | 40 | $ | 40 | ||||||||
| Commercial real estate | — | — | 31 | 31 | ||||||||||||
| Other construction and land | — | — | 126 | 126 | ||||||||||||
| Commercial | — | — | 320 | 320 | ||||||||||||
| Consumer | — | — | 10 | 10 | ||||||||||||
| Real estate owned: | ||||||||||||||||
| Commercial real estate | — | — | 513 | 513 | ||||||||||||
| Other construction and land | — | — | 1,419 | 1,419 | ||||||||||||
| Total | $ | — | $ | — | $ | 2,459 | $ | 2,459 | ||||||||
There were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2021, or December 31, 2020.
Impaired loans totaling $2.2 million at June 30, 2021 and $1.3 million at December 31, 2020 were measured using the present value of expected future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.
The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at June 30, 2021 and December 31, 2020.
Schedule of Unobservable Inputs measured at Fair Value
| 30-Jun-21 | December 31, 2020 | |||||||
| Valuation Technique | Unobservable Input | General Range | General Range | |||||
| Impaired loans | Discounted Appraisals | Collateral discounts | 0% - 30% | 0% - 30% | ||||
| Real estate owned | Discounted Appraisals | Collateral discounts and estimated selling cost | 0% - 30% | 0% - 40% | ||||
| Corporate bonds | Discounted Cash Flows | Recent similar executed financing transactions | 0% - 7% | 0% - 5.5% |
Fair Value of Financial Assets and Financial Liabilities
The estimated fair value of the Company’s financial assets and financial liabilities are summarized as follows at the dates indicated (in thousands):
Schedule of Estimated Fair Value Financial Assets and Liabilities
| Fair Value Measurements at June 30, 2021 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| Amount | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and equivalents | $ | 86,439 | $ | 86,439 | $ | 86,439 | $ | — | $ | — | ||||||||||
| Securities available for sale | 131,576 | 131,576 | — | 123,972 | 7,604 | |||||||||||||||
| Loans receivable, net of deferred fees and costs | 909,016 | 903,771 | — | — | 903,771 | |||||||||||||||
| Other investments, at cost | 4,226 | 4,226 | — | 4,226 | — | |||||||||||||||
| Accrued interest receivable | 5,495 | 5,495 | — | 5,495 | — | |||||||||||||||
| BOLI | 14,610 | 14,610 | — | 14,610 | — | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Demand deposits, money market and savings | $ | 778,040 | $ | 778,040 | $ | — | $ | 778,040 | $ | — | ||||||||||
| Time deposits | 238,342 | 238,681 | — | 238,681 | ||||||||||||||||
| Federal Home Loan Bank advances | 16,000 | 16,159 | — | 16,159 | — | |||||||||||||||
| Junior subordinated debentures | 35,804 | 35,935 | — | 35,935 | — | |||||||||||||||
| Accrued interest payable | 272 | 272 | — | 272 | — | |||||||||||||||
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| Fair Value Measurements at December 31, 2020 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| Amount | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and equivalents | $ | 63,025 | $ | 63,025 | $ | 63,025 | $ | — | $ | — | ||||||||||
| Securities available for sale | 110,707 | 110,707 | — | 106,102 | 4,605 | |||||||||||||||
| Loans receivable, net of deferred fees and costs | 878,545 | 869,602 | — | — | 869,602 | |||||||||||||||
| Other investments, at cost | 6,252 | 6,252 | — | 6,252 | — | |||||||||||||||
| Accrued interest receivable | 5,704 | 5,704 | — | 5,704 | — | |||||||||||||||
| BOLI | 14,861 | 14,861 | — | 14,861 | — | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Demand deposits, money market and savings | $ | 662,538 | $ | 580,030 | $ | — | $ | 580,030 | $ | — | ||||||||||
| Time deposits | 283,942 | 284,655 | — | 284,655 | ||||||||||||||||
| Federal Home Loan Bank advances | 16,000 | 16,274 | — | 16,274 | — | |||||||||||||||
| Junior subordinated debentures | 35,744 | 34,234 | — | 34,234 | — | |||||||||||||||
| Accrued interest payable | 336 | 336 | — | 336 | — | |||||||||||||||
NOTE 11. SHARE REPURCHASES
On June 16, 2021, the Company’s Board of Directors approved an extension of the duration of the previously announced common stock repurchase program through December 31, 2021. The previous common stock repurchase plan was set to expire June 30, 2021. Repurchased shares will become treasury shares and may be utilized for general corporate purposes.
The following table summarizes repurchase activity for the six months ended June 30, 2021.
Schedule of Share Repurchase
| Average | Total Number of | Maximum Number | ||||||||||||||
| Total Number | Price | Shares Purchased as | of Shares that May | |||||||||||||
| of Shares | Paid per | Part of the Publicly | Yet Be Purchased | |||||||||||||
| Period | Purchased | Share | Announced Program | Under the Program | ||||||||||||
| January 1, 2021 - March 31, 2021 | 135,230 | $ | 17.65 | 135,230 | 114,770 | |||||||||||
| April 1, 2021 - April 30, 2021 | 46,978 | 20.85 | 182,208 | 67,792 | ||||||||||||
| May 1, 2021 - May 31, 2021 | 28,238 | 20.25 | 210,446 | 39,554 | ||||||||||||
| June 1, 2021 - June 30, 2021 | — | — | 210,446 | 39,554 | ||||||||||||
NOTE 12. SUBSEQUENT EVENTS
Management has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30, 2021. The Company does not believe there were any material subsequent events during this period that require further recognition or disclosure in the unaudited consolidated financial statements included in this report other than the item noted below.
On July 19, 2021, the Company’s Board of Directors approved regular cash dividends of $0.10 per common share and $0.105 per Series A preferred share payable on August 13, 2021 to shareholders of record on August 4, 2021.
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| Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1932 (the “Exchange Act”), which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “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:
| ● | 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 the interest rate environment which could reduce anticipated or actual margins; |
| ● | Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the new presidential administration and Democratic control of Congress; |
| ● | Changes in economic conditions in the United States and the strength of the local economies in which we conduct our operations, including, but not limited to, due to the continuing negative impacts and disruptions resulting from the outbreak of COVID-19 on the economies and communities we serve, which may have an adverse impact on our business, operations and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally; |
| ● | Changes occurring in business conditions and inflation; |
| ● | Increased cybersecurity risk, including potential business disruptions or financial losses; |
| ● | 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; |
| ● | 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; |
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| ● | 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 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 as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021 (“2020 Form 10”).
Non-GAAP Measures
This release includes financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). This financial information includes certain operating performance measures such as “Tangible book value per common share, outstanding”.
Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses these measures in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies.
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Critical Accounting Policies and Estimates
Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2021 have remained unchanged from the disclosures presented in our 2020 Form 10. Refer to Note 1 of this Form 10-Q for more information about our accounting policies and recent accounting updates.
Overview
The Company was incorporated in 2000 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s primary purpose is to serve as the holding company for 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, the GrandSouth Trust, a Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. The GrandSouth Trust is not consolidated in the Company’s financial statements.
We provide a full range of financial services through offices located throughout South Carolina. We provide full-service retail and commercial banking products.
Our results of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.
The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this Form 10-Q and in our 2020 Form 10.
Discussion of Financial Condition
General
Total assets increased $73.7 million to $1.2 billion at June 30, 2021, or 6.8%, from December 31, 2020. This increase in assets was primarily due to increases in cash and cash equivalents of $23.4 million, investments available for sale (“AFS”) of $20.9 million, and loans of $30.5 million.
Total liabilities increased $70.7 million to $1.1 billion at June 30, 2021, or 7.1%, from December 31, 2020, due primarily to increases in total deposits of $69.9 million, which includes increases in noninterest-bearing deposits of $48.5 million.
Total shareholders’ equity increased $3.0 million to $89.5 million, or 3.4%, from December 31, 2020, 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, payment of dividends, and repurchase of common shares. Tangible book value per common share, a non-GAAP measure, increased $1.02 to $17.05 at June 30, 2021 from $16.03 at December 31, 2020.
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The following is a reconciliation of book value per common share to tangible book value per common share at the dates indicated:
| As Of | ||||||||
| (in thousands, except share data) | June 30, 2021 | December 31, 2020 | ||||||
| Book Value (GAAP) | $ | 89,487 | $ | 86,525 | ||||
| Book ValueAttributable to Preferred Shares | (1,298 | ) | (1,298 | ) | ||||
| Book Value Attributable to Common Shares | 88,189 | 85,227 | ||||||
| Goodwill and intangibles | (737 | ) | (737 | ) | ||||
| Book Value Attributable to Common Shares (Tangible) | $ | 87,452 | $ | 84,490 | ||||
| Outstanding common shares | 5,127,681 | 5,271,971 | ||||||
| Tangible Book Value Per Common Share | $ | 17.05 | $ | 16.03 | ||||
Cash and Cash Equivalents
Total cash and cash equivalents increased $23.4 million to $86.4 million at June 30, 2021 from $63.0 million at December 31, 2020, 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 hold adequate levels of liquid and short-term assets.
Investment Securities
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).
| June 30, 2021 | December 31, 2020 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| U.S. government agencies | $ | 7,467 | $ | 7,483 | $ | — | $ | — | ||||||||
| State and municipal obligations | 19,931 | 20,781 | 16,684 | 17,820 | ||||||||||||
| Mortgage-backed securities - agency | 41,553 | 41,850 | 31,056 | 31,487 | ||||||||||||
| Collateralized mortgage obligations - agency | 50,586 | 51,137 | 49,441 | 50,560 | ||||||||||||
| Asset-backed securities | 2,732 | 2,721 | 6,268 | 6,235 | ||||||||||||
| Corporate bonds | 7,450 | 7,604 | 4,500 | 4,605 | ||||||||||||
| $ | 129,719 | $ | 131,576 | $ | 107,949 | $ | 110,707 | |||||||||
AFS investment securities increased $20.9 million, or 18.9%, to $131.6 million at June 30, 2021 from $110.7 million at December 31, 2020. We continue to look for opportunities to re-deploy funds from investment securities to higher yielding loans.
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Loans
The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated (in thousands). Other construction and land loans include residential acquisition and development loans and loans on commercial undeveloped land and one-to-four family improved and unimproved lots. Commercial real estate loans include loans on non-residential owner-occupied and non-owner-occupied real estate, multi-family, and owner-occupied investment property. Commercial and industrial loans include unsecured commercial loans and commercial loans secured by business assets.
| June 30, | December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Real estate loans: | ||||||||||||||||
| One-to-four family residential | $ | 117,323 | 12.9 | % | $ | 114,119 | 13.0 | % | ||||||||
| Commercial | 405,341 | 44.5 | 369,706 | 42.0 | ||||||||||||
| Home equity loans and lines of credit | 19,046 | 2.1 | 17,174 | 2.0 | ||||||||||||
| Residential construction | 33,533 | 3.7 | 30,989 | 3.5 | ||||||||||||
| Other construction and land | 70,447 | 7.7 | 68,611 | 7.8 | ||||||||||||
| Commercial | 230,494 | 25.3 | 243,617 | 27.7 | ||||||||||||
| Consumer | 33,817 | 3.7 | 35,362 | 4.0 | ||||||||||||
| Loans receivable, gross | $ | 910,001 | 100.0 | % | $ | 879,578 | 100.0 | % | ||||||||
| Deferred loan fees, net | (909 | ) | (956 | ) | ||||||||||||
| Unaccreted discount | (261 | ) | (274 | ) | ||||||||||||
| Unamortized premium | 185 | 197 | ||||||||||||||
| Loans receivable, net of deferred fees and costs | $ | 909,016 | $ | 878,545 | ||||||||||||
Included in commercial loans are PPP loans totaling $12.5 million and $22.5 million as of June 30, 2021 and December 31, 2020, respectively.
Delinquent Loans
When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower is referred to the Bank’s Credit Administration staff to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.
The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.
If a loan is modified in a troubled debt restructure (“TDR”), the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt. For a discussion of TDRs, see the section entitled “Troubled Debt Restructurings” below.
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The following table sets forth certain information with respect to our loan portfolio carrying balances of delinquencies at the dates indicated (in thousands). We had no loans 90 days or more past due that are still accruing interest as of June 30, 2021 or December 31, 2020 that are not 98% guaranteed by the issuing agency.
| Delinquent loans | ||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and over | Total | |||||||||||||
| June 30, 2021 | ||||||||||||||||
| Commercial | $ | 3 | $ | — | $ | — | $ | 3 | ||||||||
| Consumer | 890 | 551 | 2,450 | 3,891 | ||||||||||||
| Total delinquent loans | $ | 893 | $ | 551 | $ | 2,450 | $ | 3,894 | ||||||||
| % of total loans, net | 0.10 | % | 0.06 | % | 0.27 | % | 0.43 | % | ||||||||
| December 31, 2020 | ||||||||||||||||
| One-to-four family residential | $ | — | $ | — | $ | 15 | $ | 15 | ||||||||
| Commercial | 6 | — | 2 | 8 | ||||||||||||
| Consumer | 1,840 | 727 | 2,549 | 5,116 | ||||||||||||
| Total delinquent loans | $ | 1,846 | $ | 727 | $ | 2,566 | $ | 5,139 | ||||||||
| % of total loans, net of deferred fees and costs | 0.21 | % | 0.08 | % | 0.29 | % | 0.58 | % | ||||||||
Total delinquencies as a percentage of loans have decreased from 0.58% at December 31, 2020 to 0.43% at June 30, 2021. Delinquent loans decreased $1.2 million, or 24.2%, to $3.9 million at June 30, 2021 from $5.1 million at December 31, 2020. We continue to focus on collection efforts and favorable resolutions.
Nonperforming Assets
Nonperforming loans include all loans past due 90 days and over that are not 98% guaranteed by the issuing agency, certain impaired loans, and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Nonperforming assets include nonperforming loans and other real estate owned (“REO”). The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated (in thousands).
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Nonaccrual loans: | ||||||||
| Real estate loans: | ||||||||
| One-to-four family residential | $ | 22 | $ | 39 | ||||
| Commercial | 29 | 31 | ||||||
| Other construction and land | — | 126 | ||||||
| Commercial | 166 | 324 | ||||||
| Consumer | 6 | 13 | ||||||
| Total nonperforming loans | 223 | 533 | ||||||
| REO: | ||||||||
| Commercial real estate | 451 | 513 | ||||||
| Other construction and land | 1,394 | 1,419 | ||||||
| Total foreclosed real estate | 1,845 | 1,932 | ||||||
| Total nonperforming assets | $ | 2,068 | $ | 2,465 | ||||
| TDRs still accruing | $ | 1,554 | $ | 1,254 | ||||
| Ratios: | ||||||||
| Nonperforming loans to total loans | 0.02 | % | 0.06 | % | ||||
| Nonperforming assets to total assets | 0.18 | % | 0.23 | % | ||||
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.
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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 criticized loans that experience a modification of terms to determine if a TDR has occurred. In accordance with the CARES Act and interagency guidance, the Company implemented loan modification programs in response to the COVID-19 pandemic and elected the accounting policy allowed in the CARES Act and interagency guidance to not apply TDR accounting to these modifications.
Classification of Loans
The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as “doubtful” or “loss” are charged off immediately (in thousands).
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Classified loans: | ||||||||
| Substandard | $ | 3,385 | $ | 3,701 | ||||
| Doubtful | — | — | ||||||
| Loss | — | — | ||||||
| Total classified loans: | 3,385 | 3,701 | ||||||
| Special mention | 9,123 | 7,777 | ||||||
| Total criticized loans | $ | 12,508 | $ | 11,478 | ||||
| Total classified loans as a % of total loans, net of deferred fees and costs | 0.37 | % | 0.42 | % | ||||
| Total criticized loans as a % of total loans, net of deferred fees and costs | 1.38 | % | 1.31 | % | ||||
Management continues to dedicate resources to monitoring and resolving classified and criticized loans.
Certain industries have been particularly hard-hit by the COVID-19 pandemic, including the travel and hospitality industry, the restaurant industry, and the retail industry. Although we do not have any known credit problems that are not included in the table above, we had $8.7 million of loans to the restaurant and food service industry and $5.0 million of loans to the hotel industry as of June 30, 2021.
Allowance for Loan Losses
The allowance for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers’ abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.
A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan. We individually evaluate loans, or relationships, greater than $200,000 for impairment that are classified as nonaccrual, TDRs, or performing substandard loans. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property less an estimate of selling costs if foreclosure or sale of the property is anticipated. If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment.
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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 8 loan categories, contain average net loss rates ranging from approximately 0.00% to 0.76%.
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; |
| ● | Experience, ability, and depth of lending management; |
| ● | Volume and severity of past due, nonaccrual, and classified loans; |
| ● | Collateral values; |
| ● | Loan concentrations and loan growth; and |
| ● | Economic conditions – including unemployment rates, housing prices and sales, and regional economic outlooks. |
Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends.
Our evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of our loans, including the condition of various market segments, considered changes in economic activity and unemployment rates resulting from the COVID-19 pandemic. This evaluation resulted in a reduction in reserve related to the economic conditions qualitative factor as a result of improvement in economic conditions and unemployment rates at both national and regional levels. These factors are subject to further adjustment as economic and other conditions change.
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The following table sets forth activity in our allowance for loan losses at the dates and for the periods indicated (in thousands).
| As of and for the | ||||||||
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Balance at beginning of period | $ | 12,572 | $ | 10,287 | ||||
| Charge-offs: | ||||||||
| Real Estate: | ||||||||
| One-to-four family residential | 29 | — | ||||||
| Commercial | — | — | ||||||
| Home equity loans and lines of credit | — | — | ||||||
| Residential construction | — | — | ||||||
| Other construction and land | — | — | ||||||
| Commercial | 204 | 1,211 | ||||||
| Consumer | — | 26 | ||||||
| Total charge-offs | 233 | 1,237 | ||||||
| Recoveries: | ||||||||
| Real Estate: | ||||||||
| One-to-four family residential | 19 | 2 | ||||||
| Commercial | — | — | ||||||
| Home equity loans and lines of credit | — | — | ||||||
| Residential construction | — | — | ||||||
| Other construction and land | 17 | — | ||||||
| Commercial | 399 | 554 | ||||||
| Consumer | — | 24 | ||||||
| Total recoveries | 435 | 580 | ||||||
| Net (recoveries) chargeoffs | (202 | ) | 657 | |||||
| Provision for loan losses | 551 | 1,739 | ||||||
| Balance at end of period | $ | 13,325 | $ | 11,369 | ||||
| Ratios: | ||||||||
| Net (recoveries) charge-offs to average loans outstanding | (0.02 | )% | 0.08 | % | ||||
| Allowance to nonperforming loans at period end | 5,975.34 | % | 1,312.82 | % | ||||
| Allowance to total loans at period end | 1.47 | % | 1.43 | % | ||||
Our allowance as a percentage of total loans increased to 1.47% at June 30, 2021 from 1.43% at December 31, 2020, and 1.43% at June 30, 2020, primarily as the result of loan growth.
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. However, in light of the COVID-19 pandemic, there is a risk that loss rates could increase. Our coverage ratio of nonperforming loans increased to 5,975.34% at June 30, 2021 from 2,358.72% at December 31, 2020, and 1,312.82% at June 30, 2020, primarily as the result of the reduced balance of nonperforming loans during the period.
Deposits
The following table presents deposits by category and percentage of total deposits as of the periods indicated (in thousands).
| June 30, 2021 | December 31, 2020 | |||||||||||||||
| Balance | Percent | Balance | Percent | |||||||||||||
| Deposit type: | ||||||||||||||||
| Savings accounts | $ | 13,038 | 1.3 | $ | 10,584 | 1.1 | ||||||||||
| Time deposits | 238,342 | 23.4 | 283,942 | 30.1 | ||||||||||||
| Money market accounts | 440,716 | 43.4 | 384,838 | 40.7 | ||||||||||||
| Interest-bearing demand accounts | 72,236 | 7.1 | 63,614 | 6.7 | ||||||||||||
| Noninterest-bearing demand accounts | 252,050 | 24.8 | 203,502 | 21.5 | ||||||||||||
| Total deposits | $ | 1,016,382 | 100.0 | $ | 946,480 | 100.0 | ||||||||||
36
As indicated in the above table, deposit balances increased approximately $69.9 million, or 7.4%, for the six months ended June 30, 2021 compared December 31, 2020. The increase in total deposits was mainly attributable to the $55.9 million, or 14.5%, increase in money market accounts and $48.5 million, or 23.9%, in noninterest-bearing demand accounts, offset by a $45.6 million, or 16.1%, decline in time deposits.
Discussion of Results of Operation
Comparison of the Three Months Ended June 30, 2021 and June 30, 2020.
General
Net income for the three months ended June 30, 2021 was $4.0 million, compared to $1.6 million for the same period in 2020. The increase in net income for the period was primarily the result of an increase in net interest income of $2.7 million and decreases in the provision for loan losses and noninterest expenses of $0.3 million and $0.1 million, respectively, partially offset by a decrease in noninterest income totaling $0.1 million.
Net Interest Income
Net interest income increased $2.7 million, or 28.1%, to $12.1 million for the three months ended June 30, 2021, compared to $9.5 million for the same period in 2020. The increase in net interest income was primarily due to a higher volume in loans (both Core Bank and Carbucks) and taxable investments, and decreases in costs on time deposits, partially offset by the decline in yields on our Core Bank loans and taxable investments during the period.
37
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, discounts and premiums that are amortized or accreted to interest income or expense.
| For the Three Months Ended June 30, | ||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||
| Outstanding | Outstanding | |||||||||||||||||||||||
| Balance | Interest | Yield/Rate | Balance | Interest | Yield/Rate | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans, Core Bank(1) | $ | 817,045 | $ | 8,397 | 4.12 | % | $ | 723,827 | $ | 7,681 | 4.27 | % | ||||||||||||
| Loans, Carbucks(2) | 82,789 | 4,512 | 21.86 | % | 69,697 | 3,633 | 20.97 | % | ||||||||||||||||
| Investments - taxable | 118,227 | 358 | 1.21 | % | 64,428 | 284 | 1.77 | % | ||||||||||||||||
| Investments - tax exempt (3) | 12,648 | 89 | 2.81 | % | 6,971 | 54 | 3.13 | % | ||||||||||||||||
| Federal funds sold and other interest earning deposits | 76,508 | 23 | 0.12 | % | 51,249 | 16 | 0.12 | % | ||||||||||||||||
| Other investments, at cost | 5,248 | 31 | 2.35 | % | 9,664 | 69 | 2.86 | % | ||||||||||||||||
| Total interest-earning assets | 1,112,465 | 13,410 | 4.84 | % | 925,836 | 11,737 | 5.10 | % | ||||||||||||||||
| Noninterest-earning assets | 37,716 | 38,866 | ||||||||||||||||||||||
| Total assets | $ | 1,150,181 | $ | 964,702 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Savings accounts | $ | 12,560 | $ | 3 | 0.10 | % | $ | 7,952 | $ | 2 | 0.10 | % | ||||||||||||
| Time deposits | 249,266 | 296 | 0.48 | % | 348,968 | 1,620 | 1.87 | % | ||||||||||||||||
| Money market accounts | 427,155 | 462 | 0.43 | % | 283,705 | 342 | 0.48 | % | ||||||||||||||||
| Interest bearing transaction accounts | 67,423 | 42 | 0.25 | % | 27,941 | 16 | 0.22 | % | ||||||||||||||||
| Total interest bearing deposits | 756,404 | 803 | 0.43 | % | 668,566 | 1,980 | 1.19 | % | ||||||||||||||||
| FHLB advances | 16,000 | 36 | 0.91 | % | 20,000 | 48 | 0.97 | % | ||||||||||||||||
| Junior subordinated debentures | 35,786 | 432 | 4.84 | % | 18,103 | 235 | 5.23 | % | ||||||||||||||||
| Other borrowings | — | — | — | 62 | — | 0.45 | % | |||||||||||||||||
| Total interest-bearing liabilities | 808,190 | 1,271 | 0.63 | % | 706,730 | 2,263 | 1.29 | % | ||||||||||||||||
| Noninterest-bearing deposits | 248,506 | 172,575 | ||||||||||||||||||||||
| Other non interest bearing liabilities | 5,780 | 4,922 | ||||||||||||||||||||||
| Total liabilities | 1,062,476 | 884,228 | ||||||||||||||||||||||
| Total equity | 87,705 | 80,474 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 1,150,181 | $ | 964,702 | ||||||||||||||||||||
| Tax-equivalent net interest income | $ | 12,139 | $ | 9,474 | ||||||||||||||||||||
| Net interest-earning assets (4) | $ | 304,275 | $ | 219,105 | ||||||||||||||||||||
| Average interest-earning assets to interest-bearing | 137.65 | % | 131.00 | % | ||||||||||||||||||||
| Tax-equivalent net interest rate spread (5) | 4.21 | % | 3.81 | % | ||||||||||||||||||||
| Tax-equivalent net interest margin (6) | 4.38 | % | 4.12 | % | ||||||||||||||||||||
(1) Core Bank is the bank’s primary business to provide traditional deposit and lending products and services to commercial and retail banking clients.
(2) Carbucks is the bank’s division that provides specialty floor plan lending to small automobile dealers in over 20 states.
(3) Tax exempt investments are calculated giving effect to a 21% federal tax rate, or $19,000 and $11,000 for the three months ended June 30, 2021 and 2020, 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.
38
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 change in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the absolute values of changes due to rate and the changes due to volume.
| For the Three Months Ended June 30, 2021 | ||||||||||||
| Compared to the Three Months Ended June 30, 2020 | ||||||||||||
| Increase (decrease) due to: | ||||||||||||
| (in thousands) | Volume | Rate | Total | |||||||||
| Interest-earning assets: | ||||||||||||
| Loans, Core Bank(1) | $ | 982 | $ | (266 | ) | $ | 716 | |||||
| Loans, Carbucks(1) | 717 | 162 | 879 | |||||||||
| Investments - taxable | 183 | (110 | ) | 73 | ||||||||
| Investments - tax exempt (2) | 41 | (6 | ) | 35 | ||||||||
| Federal funds sold and other interest earning | 8 | (1 | ) | 7 | ||||||||
| Other investments, at cost | (28 | ) | (10 | ) | (37 | ) | ||||||
| Total interest-earning assets | 1,904 | (231 | ) | 1,673 | ||||||||
| Interest-bearing liabilities: | ||||||||||||
| Savings accounts | 1 | — | 1 | |||||||||
| Time deposits | (367 | ) | (957 | ) | (1,324 | ) | ||||||
| Money market accounts | 159 | (39 | ) | 120 | ||||||||
| Interest bearing transaction accounts | 24 | 2 | 26 | |||||||||
| FHLB advances | (10 | ) | (2 | ) | (12 | ) | ||||||
| Junior subordinated debentures | 216 | (19 | ) | 197 | ||||||||
| Total interest-bearing liabilities | 23 | (1,015 | ) | (992 | ) | |||||||
| Change in tax-equivalent net interest income | $ | 1,881 | $ | 784 | $ | 2,665 | ||||||
(1) Non-accrual 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 $12.1 million for the three months ended June 30, 2021, compared to $9.5 million for the same period in 2020 due to both improvements in volume and favorable movements in rates.
The increase in tax-equivalent net interest income of $1.9 million related to volume was primarily the result of higher average loan (both Core Bank and Carbucks) and taxable investment balances which increased $106.3 million and $53.8 million, respectively for the three months ended June 30, 2021 compared to the same period in 2020. The increase in average loan and taxable investment balances was partially offset by increases of $143.4 million in money market balances and $39.5 million in interest bearing transaction accounts. These increases in interest bearing deposits balance were partially offset by a $99.7 million decrease in average time deposits.
The increase in tax-equivalent net interest income of $0.8 million related to rate was primarily the result of increased yields on Carbucks loans and decreased costs on time deposits, partially offset by decreased yields on Core Bank loans and taxable investments.
Our tax-equivalent net interest margin was 4.38% for the three months ended June 30, 2021, compared to 4.12% for the same period in 2020, an increase of 26 basis points. The increase in net interest margin was primarily attributable to interest rate reductions on our cost of funds partially offset by federal funds rate reductions which impacted Core Bank loans, investments, and interest-earning deposits during 2020.
Provision for Loan Losses
We recorded a provision for loan losses for the three months ended June 30, 2021 of $0.3 million due to organic loan growth, compared to a $0.7 million provision for loan losses for the same period in 2020 which included certain qualitative adjustments in response to the COVID-19 pandemic. We are experiencing continued stabilization in asset quality, low charge-off amounts, and a continued decline in the historical loss rates used in our allowance for loan losses model. However, in light of the continued COVID-19 pandemic, there is a risk that loss rates could increase.
39
Noninterest Income
The following table summarizes the components of noninterest income and the corresponding changes between the three months ended June 30, 2021 and 2020 (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Service charges on deposit accounts | $ | 322 | $ | 221 | $ | 101 | ||||||
| Gain on sale of AFS investment securities | — | 392 | (392 | ) | ||||||||
| BOLI | 85 | 103 | (18 | ) | ||||||||
| Net gain on sale of premises and equipment | 78 | 8 | 70 | |||||||||
| Other | 283 | 170 | 113 | |||||||||
| Total noninterest income | $ | 768 | $ | 894 | $ | (126 | ) | |||||
Our noninterest income decreased $0.1 million to $0.8 million in the three months ended June 30, 2021, compared to the same period in 2020 due primarily to the gain on sale of AFS investment securities in 2020 partially offset by increases in service charges on deposit accounts of $0.1 million and other noninterest of $0.1 million which includes excess death benefits of $68 thousand from the redemption of BOLI policies.
Noninterest Expense
The following table summarizes the components of noninterest expense and the corresponding change between the three months ended June 30, 2021 and 2020 (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Compensation and employee benefits | $ | 4,987 | $ | 5,044 | $ | (57 | ) | |||||
| Net occupancy | 584 | 531 | 53 | |||||||||
| Federal deposit insurance | 172 | 100 | 72 | |||||||||
| Professional and advisory | 265 | 362 | (97 | ) | ||||||||
| Data processing | 494 | 394 | 100 | |||||||||
| Marketing and advertising | 35 | 28 | 7 | |||||||||
| Net cost of operation of REO | 19 | 258 | (239 | ) | ||||||||
| Other | 847 | 817 | 30 | |||||||||
| Total noninterest expenses | $ | 7,403 | $ | 7,534 | $ | (131 | ) | |||||
Our noninterest expense decreased $0.1 million to $7.4 million in the three months ended June 30, 2021, compared to the same period in 2020. The increase in data processing expenses of $0.1 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to an increased number of accounts and transactions, was offset by a $0.2 million decrease in net cost of operation of REO due to valuation adjustments for updated appraisals or sales contract amounts in 2020.
Income Taxes
Income tax expense totaled $1.2 million for the three months ended June 30, 2021, compared to $0.5 million for the same period in 2020. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.4% and 24.5% for the three months ended June 30, 2021 and 2020, respectively.
We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.
40
Comparison of the Six Months Ended June 30, 2021 and June 30, 2020.
General
Net income for the six months ended June 30, 2021 was $7.6 million, compared to $3.5 million for the same period in 2020. The increase in net income for the period was primarily the result of an increase in net interest income of $4.1 million and a decrease in the provision for loan losses of $1.2 million, offset by an increase in income tax expense of $1.2 million.
Net Interest Income
Net interest income increased $4.1 million, or 20.6%, to $24.2 million for the six months ended June 30, 2021, compared to $20.1 million for the same period in 2020. The increase in net interest income was primarily due to a $194.5 million increase in average loans (both Core Bank and Carbucks), a $50.4 million increase in average investments(both taxable and tax exempt), and decreases in costs on our average time deposits and money market accounts, partially offset by the decline in yields on our Core Bank loans and investments during the period and a $103.9 million increase in our average interest-bearing liabilities.
41
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 annualized average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Non-accrual 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, discounts and premiums that are amortized or accreted to interest income or expense.
| For the Six Months Ended June 30, | ||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||
| Outstanding | Outstanding | |||||||||||||||||||||||
| Balance | Interest | Yield/Rate | Balance | Interest | Yield/Rate | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans, Core Bank(1) | $ | 812,361 | $ | 16,922 | 4.20 | % | $ | 702,313 | $ | 15,687 | 4.49 | % | ||||||||||||
| Loans, Carbucks(2) | 85,029 | 9,125 | 21.64 | % | 80,574 | 8,723 | 21.77 | % | ||||||||||||||||
| Investments - taxable | 109,823 | 627 | 2.28 | % | 67,371 | 654 | 3.88 | % | ||||||||||||||||
| Investments - tax exempt (3) | 12,692 | 177 | 5.59 | % | 4,720 | 76 | 6.41 | % | ||||||||||||||||
| Federal funds sold and other interest earning deposits | 66,897 | 42 | 0.13 | % | 35,507 | 89 | 0.51 | % | ||||||||||||||||
| Other investments, at cost | 5,612 | 64 | 2.29 | % | 9,643 | 129 | 2.70 | % | ||||||||||||||||
| Total interest-earning assets | 1,092,414 | 26,957 | 4.98 | % | 900,128 | 25,358 | 5.67 | % | ||||||||||||||||
| Noninterest-earning assets | 37,258 | 38,144 | ||||||||||||||||||||||
| Total assets | $ | 1,129,672 | $ | 938,273 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Savings accounts | $ | 11,723 | $ | 6 | 0.10 | % | $ | 7,377 | $ | 4 | 0.10 | % | ||||||||||||
| Time deposits | 261,826 | 791 | 0.61 | % | 360,484 | 3,637 | 2.03 | % | ||||||||||||||||
| Money market accounts | 413,736 | 915 | 0.45 | % | 275,452 | 1,052 | 0.77 | % | ||||||||||||||||
| Interest bearing transaction accounts | 65,702 | 84 | 0.26 | % | 24,025 | 21 | 0.17 | % | ||||||||||||||||
| Total interest bearing deposits | 752,987 | 1,796 | 0.48 | % | 667,338 | 4,714 | 1.42 | % | ||||||||||||||||
| FHLB advances | 16,000 | 71 | 0.89 | % | 14,879 | 81 | 1.09 | % | ||||||||||||||||
| Junior subordinated debentures | 35,772 | 865 | 4.87 | % | 18,098 | 486 | 5.40 | % | ||||||||||||||||
| Other borrowings | — | — | — | 511 | 5 | 2.12 | % | |||||||||||||||||
| Total interest-bearing liabilities | 804,759 | 2,732 | 0.68 | % | 700,826 | 5,286 | 1.52 | % | ||||||||||||||||
| Noninterest-bearing deposits | 231,882 | 152,942 | ||||||||||||||||||||||
| Other non interest bearing liabilities | 5,845 | 4,846 | ||||||||||||||||||||||
| Total liabilities | 1,042,486 | 858,614 | ||||||||||||||||||||||
| Total equity | 87,186 | 79,659 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 1,129,672 | $ | 938,273 | ||||||||||||||||||||
| Tax-equivalent net interest income | $ | 24,225 | $ | 20,072 | ||||||||||||||||||||
| Net interest-earning assets (4) | $ | 287,655 | $ | 199,303 | ||||||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities | 135.74 | % | 128.44 | % | ||||||||||||||||||||
| Tax-equivalent net interest rate spread (5) | 4.30 | % | 4.15 | % | ||||||||||||||||||||
| Tax-equivalent net interest margin (6) | 4.47 | % | 4.48 | % | ||||||||||||||||||||
(1) Core Bank is the bank’s primary business to provide traditional deposit and lending products and services to commercial and retail banking clients.
(2) Carbucks is the bank’s division that provides specialty floor plan lending to small automobile dealers in over 20 states.
(3) Tax exempt investments are calculated giving effect to a 21% federal tax rate, or $37,000 and $16,000 for the six months ended June 30, 2021 and 2020, 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.
42
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 change 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 changes due to rate and the changes due to volume.
| For the Six Months Ended June, 2021 | ||||||||||||
| Compared to the Six Months Ended June 30, 2020 | ||||||||||||
| Increase (decrease) due to: | ||||||||||||
| (In thousands) | Volume | Rate | Total | |||||||||
| Interest-earning assets: | ||||||||||||
| Loans, Core Bank (1) | $ | 2,308 | $ | (1,073 | ) | $ | 1,235 | |||||
| Loans, Carbucks (1) | 458 | (56 | ) | 402 | ||||||||
| Investments - taxable | 639 | (666 | ) | (27 | ) | |||||||
| Investments - tax exempt (2) | 130 | (29 | ) | 101 | ||||||||
| Interest-earning deposits | 47 | (94 | ) | (47 | ) | |||||||
| Other investments, at cost | (48 | ) | (17 | ) | (65 | ) | ||||||
| Total interest-earning assets | 3,534 | (1,935 | ) | 1,599 | ||||||||
| Interest-bearing liabilities: | ||||||||||||
| Savings accounts | 2 | — | 2 | |||||||||
| Time deposits | (800 | ) | (2,046 | ) | (2,846 | ) | ||||||
| Money market accounts | 406 | (543 | ) | (137 | ) | |||||||
| Interest bearing transaction accounts | 49 | 14 | 63 | |||||||||
| FHLB advances | 6 | (16 | ) | (10 | ) | |||||||
| Junior subordinated debentures | 431 | (52 | ) | 379 | ||||||||
| Other borrowings | (3 | ) | (2 | ) | (5 | ) | ||||||
| Total interest-bearing liabilities | 91 | (2,645 | ) | (2,554 | ) | |||||||
| Change in tax-equivalent net interest income | $ | 3,443 | 710 | 4,153 | ||||||||
(1) Non-accrual 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 $24.2 million for the six months ended June 30, 2021, compared to $20.1 million for the same period in 2020. As indicated in the table above, the increase of $3.4 million in net interest income earned attributable an improvement in volume was combined with a $0.7 million favorable movement in rates.
The increase in tax-equivalent net interest income of $3.4 million related to volume was primarily the result of higher average loan (both Core Bank and Carbucks) and investment balances (both taxable and tax exempt) which increased $114.5 million and $50.4 million, respectively, and lower time deposits which decreased $98.7 million for the six months ended June 30, 2021 compared to the same period in 2020. The increase in average loan and investment balances and lower time deposits was partially offset by increases of $138.2 million and $17.8 million in money market and junior subordinated debentures balances.
The increase in tax-equivalent net interest income of $0.7 million related to rate was primarily the result of decreased costs on time deposits and money markets accounts. These decreased costs were partially offset by decreased yields on Core Bank loans, taxable investments, and interest-earning deposits.
Our tax-equivalent net interest margin was 4.47% for the six months ended June 30, 2021, compared to 4.48% for the same period in 2020. The decrease in net interest margin was primarily attributable to interest rate reductions on our cost of funds, partially offset by the impact of these interest rate reductions on loans, investments, and interest-earning deposits.
Provision for Loan Losses
We recorded a provision for loan losses for the six months ended June 30, 2021 of $0.6 million due to organic loan growth, compared to a $1.7 million provision for loan losses for the same period in 2020 which included certain qualitative adjustments in response to the COVID-19 pandemic. We are experiencing continued stabilization in asset quality, low charge-off amounts, and a continued decline in the historical loss rates used in our allowance for loan losses model. However, in light of the continued COVID-19 pandemic, there is a risk that loss rates could increase.
43
Noninterest Income
The following table summarizes the components of noninterest income and the corresponding changes between the six months ended June 30, 2021 and 2020 (in thousands):
| Six Months Ended June 30, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Service charges on deposit accounts | $ | 590 | $ | 456 | $ | 134 | ||||||
| Gain on sale of AFS investments | — | 392 | (392 | ) | ||||||||
| BOLI | 177 | 204 | (27 | ) | ||||||||
| Net gain on sale of premises and equipment | 84 | 8 | 76 | |||||||||
| Other | 492 | 338 | 154 | |||||||||
| Total noninterest income | $ | 1,343 | $ | 1,398 | $ | (55 | ) | |||||
Our noninterest income decreased $0.1 million to $1.3 million in the six months ended June 30, 2021, compared to the same period in 2020 due primarily to gain on sale of AFS securities of $0.4 million in 2020, partially offset by increases in service charges on deposit accounts and third-party loan referral fees and excess death benefits in 2021.
Noninterest Expense
The following table summarizes the components of noninterest expense and the corresponding change between the six months ended June 30, 2021 and 2020 (in thousands):
| Six Months Ended June 30, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Compensation and employee benefits | $ | 10,061 | $ | 10,200 | $ | (139 | ) | |||||
| Net occupancy | 1,148 | 1,085 | 63 | |||||||||
| Federal deposit insurance | 325 | 231 | 94 | |||||||||
| Professional and advisory | 574 | 634 | (60 | ) | ||||||||
| Data processing | 1,027 | 844 | 183 | |||||||||
| Marketing and advertising | 79 | 86 | (7 | ) | ||||||||
| Net cost of operation of REO | 129 | 273 | (144 | ) | ||||||||
| Other | 1,727 | 1,676 | 51 | |||||||||
| Total noninterest expenses | $ | 15,070 | $ | 15,029 | $ | 41 | ||||||
Our noninterest expense increased $41 thousand to $15.1 million in the six months ended June 30, 2021, compared to the same period in 2020. Compensation and employee benefits decreased $0.1 million for the six months ended June 30, 2021, as compared to the same period in 2020. The decrease is primarily related to decreased full-time equivalent employees, partially offset by annual raises and increases in employee benefits, incentives and commissions.
Data processing expenses increased $0.2 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to an increased number of accounts and transactions.
Net cost of operation of REO decreased $0.1 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to valuation adjustments for updated appraisals or sales contract amounts in 2020.
Income Taxes
Income tax expense totaled $2.4 million for the six months ended June 30, 2021, compared to $1.1 million for the same period in 2020. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.7% and 24.3% for the six months ended June 30, 2021 and 2020.
44
We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.
Discussion of Segment Results
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.
| As of and for the Three Months Ended June 30, 2021 | As of and for the Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
| Core Bank | Carbucks | Other | Total | Core Bank | Carbucks | Other | Total | |||||||||||||||||||||||||
| Interest income | $ | 8,449 | $ | 4,512 | $ | 430 | $ | 13,391 | $ | 7,861 | $ | 3,534 | $ | 331 | $ | 11,726 | ||||||||||||||||
| Interest expense | 499 | 340 | 432 | 1,271 | 1,700 | 327 | 236 | 2,263 | ||||||||||||||||||||||||
| Net interest income | 7,950 | 4,172 | (2 | ) | 12,120 | 6,161 | 3,207 | 95 | 9,463 | |||||||||||||||||||||||
| Provision for loan losses | 68 | 241 | — | 309 | 698 | (42 | ) | — | 656 | |||||||||||||||||||||||
| Noninterest income | 577 | 38 | 153 | 768 | 271 | 127 | 496 | 894 | ||||||||||||||||||||||||
| Noninterest expense | 4,941 | 2,440 | 22 | 7,403 | 5,200 | 2,315 | 19 | 7,534 | ||||||||||||||||||||||||
| Net income before taxes | 3,518 | 1,529 | 129 | 5,176 | 534 | 1,061 | 572 | 2,167 | ||||||||||||||||||||||||
| Income tax expense | 826 | 356 | 31 | 1,213 | 132 | 261 | 139 | 532 | ||||||||||||||||||||||||
| Net income | $ | 2,692 | $ | 1,173 | $ | 98 | $ | 3,963 | $ | 402 | $ | 800 | $ | 433 | $ | 1,635 | ||||||||||||||||
| Total loans, net of deferred fees and costs | $ | 821,535 | $ | 87,480 | $ | — | $ | 909,016 | $ | 736,488 | $ | 60,245 | $ | — | $ | 796,732 | ||||||||||||||||
| Total assets | $ | 930,199 | $ | 86,833 | $ | 146,439 | $ | 1,163,471 | $ | 815,737 | $ | 60,234 | $ | 117,500 | $ | 993,471 | ||||||||||||||||
Comparison of the Three Months Ended June 30, 2021 and 2020.
Core Bank
Core Bank consists of commercial and consumer lending and full-service branches in its geographic region with its own management team. The branches provide a full range of traditional banking products as well as treasury services and merchant services.
Core Bank net income increased $2.3 million to $2.7 million for the three months ended June 30, 2021 compared to $0.4 million for the same period in 2020. Net interest income increased $1.8 million to $8.0 million for the three months ended June 30, 2021 from $6.2 million for the same period a year ago primarily due to increased loan volume and reduced funding costs. Provision for loan losses decreased $0.6 million for the three months ended June 30, 2021 compared to 2020 due to certain qualitative adjustments made in the three months ended June 30, 2020 in response to the COVID-19 pandemic, offset by organic growth in the three months ended June 30, 2021. Noninterest income increased $0.3 million for the three months ended June 30, 2021 compared to the same period in 2020 due to increases in service charges on deposit accounts, third-party loan referral fees, and excess death benefits. Noninterest expense decreased $0.3 million to $4.9 million for the 2021 period compared to $5.2 million for the same period in 2020 due to primarily to net cost of operation of REO in 2020 partially offset by increased data processing expense in 2021.
Carbucks
Carbucks provides specialty floor plan inventory financing for more than 1,500 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 11,000 floored used vehicles with an average price of $6,000 per unit, generally has an average 60-day turnover, and generates approximately $200 in financing fees per vehicle which is included in loan interest income.
45
Carbucks net income increased $0.4 million to $1.2 million for the three months ended June 30, 2021 compared to $0.8 million for the same three-month period in 2020. Net interest income increased $1.0 million to $4.2 million for the 2021 period from $3.2 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses increased $0.3 million for the three months ended June 30, 2021 compared to 2020 due to increased inventory levels. Noninterest expense increased $0.1 million to $2.4 million for the 2021 period compared to $2.3 million for the same period in 2020 due primarily to increased vehicle identification related fees as a result of increased inventory.
Other
Other includes parent company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.
Other net income decreased $0.3 million to $0.1 for the three months ended June 30, 2021 compared to net income of $0.4 million for the same period in 2020 primarily due increased interest expense related to the Company’s subordinated debt issuance and gain on sale of AFS securities in 2020, partially offset by increased AFS investment interest .
| As of and for the Six Months Ended June 30, 2021 | As of and for the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
| Core Bank | Carbucks | Other | Total | Core Bank | Carbucks | Other | Total | |||||||||||||||||||||||||
| Interest income | $ | 17,026 | $ | 9,125 | $ | 769 | $ | 26,920 | $ | 15,901 | $ | 8,723 | $ | 718 | $ | 25,342 | ||||||||||||||||
| Interest expense | 1,162 | 705 | 865 | 2,732 | 3,742 | 1,058 | 486 | 5,286 | ||||||||||||||||||||||||
| Net interest income | 15,864 | 8,420 | (96 | ) | 24,188 | 12,159 | 7,665 | 232 | 20,056 | |||||||||||||||||||||||
| Provision for loan losses | 591 | (40 | ) | — | 551 | 1,602 | 137 | — | 1,739 | |||||||||||||||||||||||
| Noninterest income | 1,024 | 75 | 244 | 1,343 | 528 | 274 | 596 | 1,398 | ||||||||||||||||||||||||
| Noninterest expense | 10,158 | 4,875 | 37 | 15,070 | 9,850 | 5,148 | 31 | 15,029 | ||||||||||||||||||||||||
| Net income before taxes | 6,139 | 3,660 | 111 | 9,910 | 1,235 | 2,654 | 797 | 4,686 | ||||||||||||||||||||||||
| Income tax expense | 1,457 | 869 | 27 | 2,353 | 301 | 646 | 192 | 1,139 | ||||||||||||||||||||||||
| Net income | $ | 4,682 | $ | 2,791 | $ | 84 | $ | 7,557 | $ | 934 | $ | 2,008 | $ | 605 | $ | 3,547 | ||||||||||||||||
| Total loans, net of deferred fees and costs | $ | 821,535 | $ | 87,480 | $ | — | $ | 909,016 | $ | 736,488 | $ | 60,245 | $ | — | $ | 796,732 | ||||||||||||||||
| Total assets | $ | 930,199 | $ | 86,833 | $ | 146,439 | $ | 1,163,471 | $ | 815,737 | $ | 60,234 | $ | 117,500 | $ | 993,471 | ||||||||||||||||
Comparison of the Six Months Ended June 30, 2021 and 2020.
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 $3.7 million to $4.7 million for the six months ended June 30, 2021 compared to $1.0 million for the same period in 2020. Net interest income increased $3.7 million to $15.9 million for the six months ended June 30, 2021 from $12.2 million for the same period a year ago primarily due to increased loan and volume and reduced funding costs. Provision for loan losses decreased $1.0 million for the six months ended June 30, 2021 compared to 2020 due to certain qualitative adjustments made in the three months ended June 30, 2020 in response to the COVID-19 pandemic, offset by organic growth in the six months ended June 30, 2021. Noninterest income increased $0.5 million for the six months ended June 30, 2021 compared to the same period in 2020 due to increases in service charges on deposit accounts, third-party loan referral fees, and excess death benefits. Noninterest expense increased $0.3 million to $10.1 million for the 2021 period compared to $9.8 million for the same period in 2020 due to primarily to increases in federal deposit insurance and data processing expense partially offset by net cost of operation of REO in 2020.
46
Carbucks
Carbucks provides specialty floor plan inventory financing for more than 1,500 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 11,000 floored used vehicles with an average price of $6,000 per unit, generally has an average 60-day turnover, and generates approximately $200 in financing fees per vehicle which is included in loan interest income.
Carbucks net income increased $0.8 million to $2.8 million for the six months ended June 30, 2021 compared to $2.0 million for the same period in 2020. Net interest income increased $0.7 million to $8.4 million for the 2021 period from $7.7 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased $0.2 million for the six months ended June 30, 2021 compared to 2020 due to improvements in certain qualitative factors related to COVID-19 in 2020. Noninterest expense decreased $0.2 million to $4.9 million for the 2021 period compared to $5.1 million for the same period in 2020 due primarily to decreased vehicle identification related fees as a result of reduced inventory in early 2021.
Other
Other includes parent company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.
Other net income decreased $0.5 million to $0.1 million for the six months ended June 30, 2021 compared to net income of $0.6 million for the same period in 2020 primarily due increased interest expense related to the Company’s subordinated debt issuance and gain on sale of AFS securities in 2020.
Liquidity and Capital Resources
Liquidity and Market Risk. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Atlanta (“FHLB”), and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ALCO, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2021.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in FHLB and Federal Reserve Bank of Richmond (“FRB”) interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At June 30, 2021, cash and cash equivalents totaled $86.4 million. Included in this total was $50.0 million held at the FRB, $0.7 million held at the FHLB, and $31.9 million held at correspondent banks in interest-earning accounts.
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Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources and uses of liquidity during the six months ended June 30, 2021, and 2020 (in thousands):
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Investing activities: | ||||||||
| Purchases of investments | $ | (37,013 | ) | $ | (52,684 | ) | ||
| Maturities and principal repayments of investments | 14,565 | 6,761 | ||||||
| Sales of investments | — | 18,787 | ||||||
| Net increase in loans | (30,489 | ) | (41,342 | ) | ||||
| Financing activities: | ||||||||
| Net increase in deposits | $ | 69,902 | $ | 54,436 | ||||
| Repurchase of common stock | (3,946 | ) | — | |||||
| Proceeds from FHLB advances | — | 20,000 | ||||||
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 or six months ended June 30, 2021 or 2020.
At June 30, 2021, we had $294.8 million in outstanding commitments to extend credit through unused lines of credit and stand-by letters of credit.
Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit. Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large portion of our retail certificates of deposit with maturities of one year or less as June 30, 2021.
In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows.
Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with the FHLB. The following summarizes our borrowing capacity as of June 30, 2021 (in thousands):
| Total | Used | Unused | ||||||||||
| Capacity | Capacity | Capacity | ||||||||||
| FHLB | ||||||||||||
| Loan collateral capacity | $ | 340,827 | ||||||||||
| Pledgeable marketable securities | 131,576 | |||||||||||
| FHLB totals | 472,403 | $ | 16,000 | $ | 456,403 | |||||||
| Fed funds lines | 51,000 | — | 51,000 | |||||||||
| $ | 523,403 | $ | 16,000 | $ | 507,403 | |||||||
Capital Resources. Shareholders’ equity increased $3.0 million to $89.5 million at June 30, 2021 compared to $86.5 million at December 31, 2020. This increase was primarily attributable to net income of $7.6 million, stock-based compensation of $0.3 million, and stock options exercised of $0.8 million partially offset by stock repurchases of $3.9 million, after-tax decreases in market value of AFS investment securities of $0.7 million and dividends declared of $1.1 million.
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On June 16, 2021, the Company’s Board of Directors approved an extension of the duration of the previously announced common stock repurchase program (“Stock Repurchase Plan”) through December 31, 2021. The previous Stock Repurchase Plan was set to expire June 30, 2021. Pursuant to the Stock Repurchase Plan, the Company may repurchase 250,000 common shares including shares repurchased prior to the extension of the Stock Repurchase Plan. Prior to its extension, the Company had repurchased 210,446 shares for an aggregate amount of $3.9 million under the Stock Repurchase Plan. The remaining capacity under the Stock Repurchase Plan is 39,554 common shares.
Repurchased shares will become treasury shares and may be utilized for general corporate purposes.
The tables below summarize the capital amounts and ratios of the Bank and the minimum regulatory requirements in accordance with Basel III and the prompt corrective action provisions at June 30, 2021 and December 31, 2020 (dollars in thousands).
| To Be Well- | ||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||
| For Capital Adequacy | Prompt Corrective | |||||||||||||||||||||||
| Actual | Purposes (1) | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of June 30, 2021: | ||||||||||||||||||||||||
| Tier 1 Leverage Capital | $ | 114,087 | 9.93 | % | $ | 45,967 | ≥4% | $ | 57,459 | ≥5% | ||||||||||||||
| Common Equity Tier 1 Capital | $ | 114,087 | 12.03 | % | $ | 66,387 | ≥7.0% | $ | 61,645 | ≥6.5% | ||||||||||||||
| Tier 1 Risk-based Capital | $ | 114,087 | 12.03 | % | $ | 80,613 | ≥8.5% | $ | 75,871 | ≥8% | ||||||||||||||
| Total Risk-based Capital | $ | 125,960 | 13.28 | % | $ | 99,580 | ≥10.5% | $ | 94,838 | ≥10% | ||||||||||||||
| As of December 31, 2020: | ||||||||||||||||||||||||
| Tier 1 Leverage Capital | $ | 105,820 | 10.05 | % | $ | 36,100 | ≥4% | $ | 45,125 | ≥5% | ||||||||||||||
| Common Equity Tier 1 Capital | $ | 105,820 | 11.73 | % | $ | 63,174 | ≥7.0% | $ | 58,662 | ≥6.5% | ||||||||||||||
| Tier 1 Risk-based Capital | $ | 105,820 | 11.73 | % | $ | 76,712 | ≥8.5% | $ | 72,199 | ≥8% | ||||||||||||||
| Total Risk-based Capital | $ | 117,117 | 12.98 | % | $ | 94,761 | ≥10.5% | $ | 90,249 | ≥10% | ||||||||||||||
| 1) | Includes capital conservation buffer of 2.50%. |
The tables below summarize the capital amounts and ratios of the Company and the minimum regulatory requirements in accordance with Basel III at June 30, 2021, and December 31, 2020 (in thousands).
| For Capital Adequacy | ||||||||||||||||
| Actual | Purposes (1) | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
| As of June 30, 2021: | ||||||||||||||||
| Tier I Leverage Capital | $ | 95,543 | 8.31 | % | $ | 45,978 | ≥4% | |||||||||
| Common Equity Tier 1 Capital | $ | 87,296 | 9.20 | % | $ | 66,442 | ≥7.0% | |||||||||
| Tier I Risk-based Capital | $ | 95,543 | 10.07 | % | $ | 80,680 | ≥8.5% | |||||||||
| Total Risk Based Capital | $ | 134,983 | 14.22 | % | $ | 99,664 | ≥10.5% | |||||||||
| As of December 31, 2020: | ||||||||||||||||
| Tier I Leverage Capital | $ | 91,876 | 8.72 | % | $ | 42,189 | ≥4% | |||||||||
| Common Equity Tier 1 Capital | $ | 83,629 | 9.26 | % | $ | 63,248 | ≥7.0% | |||||||||
| Tier I Risk-based Capital | $ | 91,876 | 10.17 | % | $ | 76,801 | ≥8.5% | |||||||||
| Total Risk Based Capital | $ | 130,683 | 14.46 | % | $ | 94,871 | ≥10.5% | |||||||||
| 1) | Includes capital conservation buffer of 2.50%. |
49
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
One of the most significant forms of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive risk can threaten our earnings, capital, liquidity and solvency. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The board of directors of the Bank has established an ALCO, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Our ALCO monitors and seeks to manage market risk through rate shock analyses, economic value of equity analyses and simulations in order to avoid unacceptable earnings and market value fluctuations due to changes in interest rates.
From a funding perspective, we expect to satisfy the majority of our future requirements with retail deposit growth, including checking and savings accounts, money market accounts and certificates of deposit generated within our primary markets. If our funding needs exceed our deposits, we will utilize our excess funding capacity with the FHLB.
We have taken the following steps to reduce our interest rate risk:
| ● | increased our personal and business checking accounts and our money market accounts, which are less rate-sensitive than certificates of deposit and which provide us with a stable, low-cost source of funds; |
| ● | limited the fixed rate period on loans within our portfolio; |
| ● | utilized our securities portfolio for positioning based on projected interest rate environments; |
| ● | priced certificates of deposit to encourage customers to extend to longer terms; and |
| ● | utilized FHLB advances for positioning. |
Net Interest Income. We analyze the impact of changing rates on our net interest income. Using our balance sheet as of a given date, we analyze the repricing components of individual assets, and, adjusting for changes in interest rates at 100 basis point increments, we analyze the impact on our net interest income. Changes to our net interest income are shown in the following table based on immediate changes to interest rates in 100 basis point increments.
The table below reflects the impact of an immediate increase in interest rates in 100 basis point increments on Pretax Net Interest Income (“NII”).
| June 30, 2021 | December 31, 2020 | |||||||||
| Change in Interest Rates | % Change in Pretax Net | % Change in Pretax Net | ||||||||
| (basis points) | Interest Income | Interest Income | ||||||||
| +400 | 6.4 | 7.1 | ||||||||
| +300 | 7.0 | 7.5 | ||||||||
| +200 | 5.1 | 5.4 | ||||||||
| +100 | 3.1 | 3.2 | ||||||||
| — | — | — | ||||||||
| -100 | 0.4 | 0.5 | ||||||||
The results from the rate shock analysis on NII are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means assets will reprice at a faster pace than liabilities during the short-term horizon. The implications of an asset sensitive balance sheet will differ depending upon the change in market rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, the interest rate on assets will decrease at a faster pace than liabilities. This situation generally results in a decrease in NII and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, the interest rate on assets will increase at a faster pace than liabilities. This situation generally results in an increase in NII and operating income. As indicated in the table above, a 200 basis point increase in rates would result in a 5.1% increase in NII as of June 30, 2021 as compared to a 5.4% increase in NII as of December 31, 2020, suggesting that there is a benefit for the Company to net interest income in rising interest rates. The Company generally seeks to remain neutral to the impact of changes in interest rates by maximizing current earnings while balancing the risk of changes in interest rates.
50
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2021. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of June 30, 2021, the end of the period covered by this Form 10-Q, the Company maintained effective disclosure controls and procedures.
Changes in Internal Control over Financial Reporting
There have been no changes to the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended June 30, 2021.
Item 1A. Risk Factors
There have been no material changes to the risk factors that we have previously disclosed in the “Risk Factors” section in our 2020 Form 10 as filed with the SEC on March 30, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
52
Item 6. Exhibits
(d) Exhibits. See Exhibit Index Below
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 12, 2021 | Grandsouth Bancorporation | |
| By: | /s/ John B. Garrett | |
| Name: John B. Garrett | ||
| Title: Chief Financial Officer | ||
| (Authorized Officer) | ||
54
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification:
I, Mason Y. Garrett, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Grandsouth Bancorporation (the “registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: August 12, 2021 |
/s/ Mason Y. Garrett | |
| Mason Y. Garrett | ||
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification:
I, John B. Garrett, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Grandsouth Bancorporation (the “registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: August 12, 2021 |
/s/ John B. Garrett | |
| John B. Garrett | ||
| Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Grandsouth Bancorporation (the “Company”) certify that the Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2021 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Quarterly Report on Form 10-Q fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.
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Dated: August 12, 2021 |
/s/ Mason Y. Garrett | |
| Mason Y. Garrett | ||
| Chief Executive Officer |
|
Dated: August 12, 2021 |
/s/ John B. Garrett | |
| John B. Garrett | ||
| Chief Financial Officer |
* This certificate is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.
*****