CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including information included or
incorporated by reference in this document, contains statements which constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1934. We desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1996 and are including this
statement for the express purpose of availing the Company of protections of such
safe harbor with respect to all "forward-looking statements" contained in this
Form 10-
financial condition, results of operations, plans, objectives, future
performance, and business of our Company. Forward-looking statements are based
on many assumptions and estimates and are not guarantees of future performance.
Our actual results may differ materially from those anticipated in any
forward-looking statements, as they will depend on many factors about which we
are unsure, including many factors that are beyond our control. The words "may,"
"would," "could," "should," "will," "expect," "anticipate," "predict,"
"project," "potential," "continue," "assume," "believe," "intend," "plan,"
"forecast," "goal," and "estimate," as well as similar expressions, are meant to
identify such forward-looking statements. Potential risks and uncertainties that
could cause our actual results to differ materially from those anticipated in
our forward-looking statements include, without limitations, those described
under the "Cautionary Statement Regarding Forward-Looking Statements" section of
Part 1 of our Annual Report on Form 10-K for the year ended
filed with the
? Risk from changes in economic, monetary policy, and industry conditions
? Changes in interest rates, shape of the yield curve, deposit rates, the
net interest margin and funding sources
? Market risk (including net income at risk analysis and economic value of
equity risk analysis) and inflation
? Risk inherent in making loans including repayment risks and changes in the
value of collateral
? Loan growth, the adequacy of the allowance for loan losses, provisions for
loan losses, and the assessment of problem loans
? Level, composition, and re-pricing characteristics of the securities
portfolio
? Deposit growth, change in the mix or type of deposit products and services
? Continued availability of senior management and ability to attract and
retain key personnel
? Technological changes
? Ability to control expense
? Ability to compete in our industry and competitive pressures among
depository and other financial institutions
? Changes in compensation
? Risks associated with income taxes including potential for adverse
adjustments
? Changes in accounting policies and practices
? Changes in regulatory actions, including the potential for adverse
adjustments
? Recently enacted or proposed legislation and changes in political
conditions
? Reputational risk
? Pandemic risk
? Impact of COVID-19 on the collectability of loans
? Changes in legislation as related to PPP loans
? Credit risks, determination of deficiency, or complete loss if SBA denies
PPP loans
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We will undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made
to reflect the occurrence of unanticipated events. In addition, certain
statements in future filings with the
and written statements, which are not statements of historical fact, constitute
forward-looking statements.
Overview
holding company headquartered in
in assets as of
services through its wholly-owned subsidiary,
"Bank"). The Bank is a state-chartered commercial bank which operates primarily
in the
Bank's original and current concept is to be a full-service financial
institution specializing in personal service, responsiveness, and attention to
detail to foster long standing relationships.
We derive most of our income from interest on loans and investments
(interest-earning assets). The primary source of funding for making these loans
and investments is our interest and non-interest-bearing deposits. Consequently,
one of the key measures of our success is the amount of net interest income, or
the difference between the income on our interest-earning assets and the expense
on our interest-bearing liabilities, such as deposits. Another key measure is
the spread between the yield we earn on these interest-earning assets and the
rate we pay on our interest-bearing liabilities.
A consequence of lending activities is that we may incur credit losses. The
amount of such losses will vary depending upon the risk characteristics of the
loan and lease portfolio as affected by economic conditions such as rising
interest rates and the financial performance of borrowers. The reserve for
credit losses consists of the allowance for loan losses (the "allowance") and a
reserve for unfunded commitments (the "unfunded reserve"). The allowance
provides for probable and estimable losses inherent in our loan portfolio while
the unfunded reserve provides for potential losses related to unfunded lending
commitments.
In addition to earning interest on loans and investments, we earn income through
fees and other expenses we charge to the customer. The various components of
non-interest income as well as non-interest expense are described in the
following discussion. The discussion and analysis also identify significant
factors that have affected our financial position and operating results as of
and for the periods ending
read in conjunction with the financial statements and the related notes included
in this report. In addition, a number of tables have been included to assist in
the discussion.
COVID-19
Effects of COVID-19 may negatively impact management assumptions and estimates,
such as the allowance for loan losses. However, it is difficult to assess or
predict how, and to what extent, COVID-19 will affect the Bank in the future.
Refer to Note 3: Loans and Allowance for Loan Losses for additional information
about COVID-19 and programs that were established to assist borrowers.
Critical Accounting Policies
Our critical accounting policies, which involve significant judgments and
assumptions that have a material impact on the carrying value of certain assets
and liabilities, and used in the preparation of the Consolidated Financial
Statements as of
presented in our Annual Report on Form 10-K for the year ended
2021.
Balance Sheet
Cash and Cash Equivalents
Total cash and cash equivalents decreased 50.5% or
million
decrease in total cash and cash equivalents is primarily due to purchases of
investment securities available for sale, net of proceeds from sales, calls and
maturities, and to a lesser extent, a net increase in loans and a net decrease
in deposit accounts.
Investment Securities Available for Sale
Our primary objective in managing the investment portfolio is to maintain a
portfolio of high quality, highly liquid investments yielding competitive
returns. We are required under federal regulations to maintain adequate
liquidity to ensure safe and sound operations. We maintain investment balances
based on continuing assessment of cash flows, the level of current and expected
loan production, current interest rate risk strategies and the assessment of
potential future direction of market interest rate changes. Investment
securities differ in terms of default, interest rate, liquidity and expected
rate of return risk.
We use the investment securities portfolio to serve as a vehicle to manage
interest rate and prepayment risk, to generate interest and dividend income from
investment of funds, to provide liquidity to meet funding requirements, and to
provide collateral for pledging of public funds.
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As of
Treasury Notes,
fair market value of
a net unrealized loss of approximately
38.78% and 31.26% of our total assets, respectively. The average yield on our
investment securities was 1.03% and 1.02% at
2021
Loans
We focus our lending activities on small and middle market businesses,
professionals and individuals in our geographic markets. Substantially all of
our loans are to borrowers located in our market area of
and
Net loans increased
2022
related to growth in Consumer and
decrease in PPP loans.
In
mortgage loans in excess of the conforming loan amount which are held for
investment rather than for sale in the secondary market. Prior to
all consumer mortgage loans made by the Bank were originated for the purpose of
sale and reflected on the consolidated balance sheet as mortgage loans held for
sale. This mortgage product continues to be well-received by the Bank's
customers, and the associated volume of originations has continued to contribute
to the increase in
The following table is a summary of our loan portfolio composition (net of
deferred fees and costs of
31, 2021
of
the dates indicated.
March 31, 2022 December 31, 2021
Amount Percent Amount Percent
Commercial
Commercial Real Estate Construction 14,750,474 4.68 %
12,054,095 3.93 %
Commercial Real Estate Other 167,967,452 53.34 % 165,719,078 54.04 %
Consumer Real Estate 76,712,257 24.36 % 71,307,488 23.26 %
Consumer Other 3,677,522 1.17 % 3,768,531 1.23 %
Payroll Protection Program 4,437,525 1.41 % 7,978,603 2.60 %
Total loans 314,905,975 100.00 % 306,632,229 100.00 %
Allowance for loan losses (4,304,502 ) (4,376,987 )
Total loans, net
The decrease in the deferred fees is primarily associated with the amortization
of the processing fees the Bank received from the SBA for the PPP loans. The
fees are deferred and amortized over the life of the loans in accordance with
ASC 310-20.
Nonperforming Assets
Nonperforming Assets include real estate acquired through foreclosure or deed
taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan
is placed on nonaccrual status when it becomes 90 days past due as to principal
or interest, or when we believe, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of the contractual principal or interest on the loan is
doubtful. A payment of interest on a loan that is classified as nonaccrual is
recognized as a reduction in principal when received. As of
there were no loans 90 days past due still accruing interest.
The following table is a summary of our Nonperforming Assets:
March 31,
2022 December 31, 2021
Commercial $ - $ 178,975
Commercial Real Estate Other 621,358 625,953
Consumer Real Estate - -
Consumer Other 9,022 9,686
Total nonaccruing loans 630,380 814,614
Total nonperforming assets
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Allowance for Loan Losses
The allowance for loan losses was
million
outstanding loans, net of PPP loans. Because PPP loans are 100% guaranteed by
the SBA and did not undergo the Bank's typical underwriting process, they are
not graded and do not have an associated reserve. At
31, 2021
respectively, of the total amount of nonperforming loans. Based on the level of
coverage on nonperforming loans and analysis of our loan portfolio, we believe
the allowance for loan losses at
At
these loans had a reserve of approximately
allowance for loan losses. Comparatively, impaired loans totaled
of
approximately
During the three months ended
and
Deposits
Deposits remain our primary source of funding for loans and investments. Average
interest-bearing deposits provided funding for 53.85% of average earning assets
for the three months ended
institutions as well as consumer and commercial finance companies, insurance
companies and brokerage firms located in the primary service area of the Bank.
However, the percentage of funding provided by deposits has remained stable.
The breakdown of total deposits by type and the respective percentage of total
deposits are as follows:
March 31, 2022 December 31, 2021
Amount Percent Amount Percent
Deposits
Non-interest bearing
demand
Interest bearing demand 159,954,068 26.49 % 165,335,038 27.14 %
Money market accounts 92,136,722 15.26 % 98,113,942 16.11 %
Time deposits
and over 7,668,871 1.27 % 7,417,864 1.22 %
Other time deposits 13,424,001 2.22 % 13,870,356 2.28 %
Other savings deposits 71,849,648 11.90 % 68,670,732 11.27 %
Total deposits
Deposits decreased 0.89% or
2022
deposit accounts. The higher balance in 2021 for these demand deposit accounts
was temporary in nature.
At
balance of
Comparison of Three Months Ended
2021
Net income decreased
diluted earnings per share of
from
respectively, for the three months ended
on average assets and average equity for the three months ended
were 0.88% and 11.24%, respectively, compared with 1.37% and 13.26%,
respectively, for the three months ended
Net Interest Income
Net interest income is affected by the size and mix of our balance sheet
components as well as the spread between interest earned on assets and interest
paid on liabilities. Net interest margin is a measure of the difference between
interest income on earning assets and interest paid on interest bearing
liabilities relative to the amount of interest-bearing assets. Net interest
income decreased
ended
2021
three months ended
months ended
4.99% and 5.52% for the three months ended
respectively. Interest income on loans decreased
months ended
months ended
The average balance of interest bearing deposits at the
increased
months ended
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Provision for Loan Losses
We have established an allowance for loan losses through a charge (credit) to
the provision for loan losses on our consolidated statements of income. We
review our loan portfolio periodically to evaluate our outstanding loans and to
measure both the performance of the portfolio and the adequacy of our allowance
for loan losses. For the three months ended
of
provision for loan losses was based on our analysis of the adequacy of the
allowance for loan losses. For additional information about the changes in the
allowance and an allocation of the allowance by class, refer to Note 3. Loans
and Allowance for Loan Losses.
Non-Interest Income
Other income decreased
months ended
31, 2021
banking income, partially offset by
securities. The Bank sold
the three months ended
three months ended
Non-Interest Expense
Non-interest expense was
2022
salaries and employee benefits and net occupancy expense were offset by
decreases in data processing fees and other operating expenses.
Income Tax Expense
Income tax expense was
compared to
was 23.39% and 23.81% for the three months ended
respectively.
Off-Balance Sheet Arrangements
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on our credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, negotiable instruments, inventory, property, plant and equipment,
and real estate. Commitments to extend credit, including unused lines of credit,
amounted to
2021
Standby letters of credit represent our obligation to a third-party contingent
upon the failure of our customer to perform under the terms of an underlying
contract with the third party or obligates us to guarantee or stand as surety
for the benefit of the third party. The underlying contract may entail either
financial or nonfinancial obligations and may involve such things as the
shipment of goods, performance of a contract, or repayment of an obligation.
Under the terms of a standby letter, generally drafts will be drawn only when
the underlying event fails to occur as intended. We can seek recovery of the
amounts paid from the borrower. The majority of these standby letters of credit
are unsecured.
Commitments under standby letters of credit are usually for one year or less.
The maximum potential amount of undiscounted future payments related to standby
letters of credit at both
We originate certain fixed rate residential loans and commit these loans for
sale. The commitments to originate fixed rate residential loans and the sales
commitments are freestanding derivative instruments. We had forward sales
commitments on mortgage loans held for sale totaling
million
these commitments was not significant at
had no embedded derivative instruments requiring separate accounting treatment.
Once we sell certain fixed rate residential loans, the loans are no longer
reportable on our balance sheet. With most of these sales, we have an obligation
to repurchase the loan in the event of a default of principal or interest on the
loan. This recourse period ranges from three to nine months. Misrepresentation
or fraud carries unlimited time for recourse. The unpaid principal balance of
loans sold with recourse was
loans repurchased during the three months ended
Liquidity
Historically, we have maintained our liquidity at levels believed to be adequate
to meet requirements of normal operations, potential deposit outflows and strong
loan demand and still allow for optimal investment of funds and return on
assets.
We manage our assets and liabilities to ensure there is sufficient liquidity to
enable management to fund deposit withdrawals, loan demand, capital
expenditures, reserve requirements, operating expenses, dividends and to manage
daily operations on an ongoing basis. Funds are primarily provided by the Bank
through customer deposits, principal and interest payments on loans, mortgage
loan sales, the sale or maturity of securities, temporary investments and
earnings.
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Proper liquidity management is crucial to ensure that we are able to take
advantage of new business opportunities as well as meet the credit needs of our
existing customers. Investment securities are an important tool in our liquidity
management. Our primary liquid assets are cash and due from banks, investment
securities available for sale, interest-bearing deposits at the
and mortgage loans held for sale. Our primary liquid assets accounted for 49.61%
and 52.30% of total assets at
respectively. Securities classified as available for sale, which are not
pledged, may be sold in response to changes in interest rates and liquidity
needs. All of the investment securities presently owned are classified as
available for sale. Net cash provided by operations and deposits from customers
have been the primary sources of liquidity. At
short-term lines of credit totaling approximately
withdrawn at the lender's option). Additional sources of funds available to us
for liquidity include borrowing on a short-term basis from the
System
loans held for sale. We established a Borrower-In-Custody arrangement with the
pledged as collateral to secure advances from the Federal Reserve Discount
Window. At
no borrowings under this arrangement.
Our core deposits consist of non-interest-bearing accounts, NOW accounts, money
market accounts, time deposits and savings accounts. We closely monitor our
level of certificates of deposit greater than
We maintain a Contingency Funding Plan ("CFP') that identifies liquidity needs
and weighs alternate courses of action designed to address these needs in
emergency situations. We perform a quarterly cash flow analysis and stress test
the CFP to evaluate the expected funding needs and funding capacity during a
liquidity stress event. We believe our liquidity sources are adequate to meet
our operating needs and do not know of any trends, events or uncertainties that
may result in a significant adverse effect on our liquidity position. At
31, 2022
respectively.
Capital Resources
Our capital needs have been met to date through the
raised in our initial offering, the retention of earnings less dividends paid
and the exercise of stock options to purchase stock. Total shareholders' equity
as of
inception has not negatively impacted this capital base.
On
the
banks ("Basel III"). Following the actions by the
approved regulatory capital requirements on
identical in substance to the final rules issued by the
The Bank adopted the community bank leverage ratio ("CBLR") framework, a
simplified measure of capital adequacy for qualifying community banking
organizations, as of
other capital and leverage requirements. To be considered well capitalized, the
required CBLR was 8.5% for the year ended
thereafter. Additionally, the qualifying community banking institution must be a
non-advanced approaches
does not feet any of the eligibility criteria, it would have a two-quarter
"grace" period to return to CBLR compliance or revert to the generally
applicable rule. If an electing bank's leverage ratio falls below 9.0%, the bank
would be deemed well capitalized during the grace period as long as the bank's
leverage ratio remains above 8.0%. If an electing bank's leverage ratio falls to
8.0% or less, it would be required to revert immediately to the generally
applicable rule. As of
required CBRL of 8.5% to be categorized as "well capitalized." As of
2022
two-quarter grace period.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken, could have a material effect on the financial statements.
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