GRANDSOUTH BANCORPORATION CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1932 (the "Exchange Act"), which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "continue," "seek," "could," "expect," "will," "may" and words of similar meaning. These forward-looking statements include, but are not limited to (i) our goals, intentions, business plans, objectives, strategies, projected growth, anticipated future financial performance (including underlying assumptions), and management's long-term performance goals, (ii) the anticipated effects or consequences of various transactions or events on our results of operations and financial condition, including, but not limited to, statements regarding our outlook and expectations with respect to our planned Merger withFirst Bancorp , the strategic and financial benefits of the Merger, including the expected impact of the Merger on the combined company's scale, deposit franchise, growth and future financial performance, and the timing of the closing of the Merger. These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company is under no duty to and does not undertake any obligation to update any forward-looking statements after the date of this Form 10-Q except as required by law.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· Changes in the interest rate environment which could reduce anticipated or
actual margins;
· Restrictions or conditions imposed by our regulators on our operations;
· Increases in competitive pressure in the banking and financial services
industries;
· Changes in access to funding or increased regulatory requirements with regard
to funding, which could impair our liquidity;
· Changes in deposit flows, which may be negatively affected by a number of
factors, including rates paid by competitors, general interest rate levels,
regulatory capital requirements, returns available to clients on alternative
investments and general economic conditions;
· Credit losses as a result of declining real estate values, increasing interest
rates, increasing unemployment, changes in payment behavior or other factors;
· Credit losses due to loan concentration;
· Changes in the amount of our loan portfolio collateralized by real estate and
weaknesses in the real estate market;
· Our ability to attract and retain key personnel;
· The success and costs of our expansion into potential new markets;
· Changes in political conditions or the legislative or regulatory environment,
including governmental initiatives affecting the financial services industry,
including as a result of the presidential administration and Democratic control
of
· Changes in economic conditions in
local economies in which we conduct our operations, which may have an adverse
impact on our business, operations and performance, and could have a negative
impact on our credit portfolio, share price, borrowers, and on the economy as a
whole, both domestically and globally;
· Changes occurring in business conditions and inflation;
· Increased cybersecurity risk, including potential business disruptions or
financial losses;
· Changes in technology;
· The adequacy of the level of our allowance for loan losses and the amount of
loan loss provisions required in future periods;
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· Examinations by our regulatory authorities, including the possibility that the
regulatory authorities may, among other things, require us to increase our
allowance for loan losses or write-down assets;
· Changes in monetary and tax policies;
· Risks associated with actual or potential litigation or investigations by
customers, regulatory agencies or others;
· The rate of delinquencies and amounts of loans charged-off;
· The rate of loan growth in recent years and the lack of seasoning of a portion
of our loan portfolio;
· Our ability to maintain appropriate levels of capital and to comply with our
capital ratio requirements;
· Adverse changes in asset quality and resulting credit risk-related losses and
expenses;
· Changes in accounting policies, practices or guidelines;
· Adverse effects of failures by our vendors to provide agreed upon services in
the manner and at the cost agreed;
· The potential effects of events beyond our control that may have a
destabilizing effect on financial markets and the economy, such as epidemics
and pandemics, supply chains disruptions in transportation, war or terrorist
activities, essential utility outages or trade disputes and tariffs;
· the failure of either company to satisfy any of the closing conditions to the
Merger on a timely basis or at all;
· the occurrence of any event, change or other circumstances that could give rise
to the right of one or both of the parties to terminate the Merger Agreement;
· the possibility that the anticipated benefits of the Merger, including
anticipated cost savings and strategic gains, are not realized when expected or
at all, including as a result of the impact of, or problems arising from, the
integration of the two companies or as a result of the strength of the economy,
competitive factors in the areas where we and
a result of other unexpected factors or events;
· the impact of purchase accounting with respect to the Merger, or any change in
the assumptions used regarding the assets purchased and liabilities assumed to
determine their fair value;
· diversion of management's attention from ongoing business operations and
opportunities;
· potential adverse reactions or changes to business or employee relationships,
including those resulting from the announcement or completion of the Merger;
· the outcome of any legal proceedings that may be instituted against us and/or
· the integration of our business and operations with
take longer than anticipated or be more costly than anticipated or have
unanticipated adverse results relating to our existing business or the existing
business of
· business disruptions following the Merger;
· other factors that may affect future results of the combined company including
changes in asset quality and credit risk; the inability to sustain revenue and
earnings growth; changes in interest rates and capital markets; inflation;
customer borrowing, repayment, investment and deposit practices; changes in
general economic conditions; the impact, extent and timing of technological
changes; capital management activities; and other actions of the banking
regulators and legislative and regulatory actions and reforms; and
· descriptions of assumptions underlying or relating to any of the foregoing.
For additional information with respect to factors that could cause actual
results to differ from the expectations stated in the forward-looking
statements, see "Risk Factors" under Part I, Item 1A of our Form 10-K as filed
with the
Non-GAAP Measures
This Form 10-Q includes financial information determined by a method other than
in accordance with generally accepted accounting principles ("GAAP"). This
financial information includes the operating performance measure "Tangible book
value per common share, outstanding".
Management has included this non-GAAP measure because it believes this measure
may provide useful supplemental information for evaluating the Company's
underlying performance trends. Further, management uses this measure in managing
and evaluating the Company's business and intends to refer to them in
discussions about our operations and performance. Operating performance measures
should be viewed in addition to, and not as an alternative to or substitute for,
measures determined in accordance with GAAP, and are not necessarily comparable
to non-GAAP measures that may be presented by other companies.
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Critical Accounting Estimates
Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as ofSeptember 30, 2022 have remained unchanged from the disclosures presented in our 2021 Form 10-K. Refer to Note 1 in the notes to the consolidated financial statements included under Item 1 -"Financial Statements" of this Form 10-Q for more information about recent accounting updates.
Overview
GrandSouth Bancorporation ("we," "us," "our," or the "Company") was incorporated in 2000 under the laws ofSouth Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956. The Company's primary purpose is to serve as the holding company forGrandSouth Bank (the "Bank"). OnOctober 2, 2000 , pursuant to a Plan of Exchange approved by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company, and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other than that of owning the Bank and has no employees. The Company has one non-bank subsidiary, GrandSouth Capital Trust I (the "Trust"), aDelaware statutory trust, formed to facilitate the issuance of trust preferred securities.The GrandSouth Trust is not consolidated in the Company's financial statements.
We provide a full range of financial services through offices located throughout
Our results of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.
The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company's operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this Form 10-Q and in our 2021 Form 10-K.
Discussion of Financial Condition
General
Total assets increased
Total liabilities increased$51.2 million to$1.2 billion atSeptember 30, 2022 , or 4.62%, fromDecember 31, 2021 , due primarily to increases in total deposits of$51.0 million , which includes increases in noninterest-bearing deposits of$38.5 million . Total shareholders' equity decreased$0.9 million to$96.5 million , or 0.93%, fromDecember 31, 2021 , due to changes in the fair value of AFS investments and payment of dividends partially offset by normal retention of earnings, exercise of stock options, and stock-based compensation expense. Book Value per common share decreased$0.37 to$18.24 atSeptember 30, 2022 from$18.61 atDecember 31, 2021 . Tangible book value per common share, a non-GAAP measure, also decreased$0.37 to$18.10 atSeptember 30, 2022 from$18.47 atDecember 31 ,
2021.
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The following is a reconciliations of book value to book value per common share
and book value to tangible book value per common share for the periods
indicated:
As Of
September 30 , December 31 ,(in thousands, except share data) 2022 2021 Book Value (GAAP)$ 96,497 $ 97,405 Book Value Attributable to Preferred Shares (1,204 ) (1,204 ) Book Value Attributable to Common Shares 95,293 96,201 Outstanding common shares 5,225,042 5,168,681 Book Value Per Common Share $ 18.24$ 18.61 Book Value (GAAP)$ 96,497 $ 97,405 Book Value Attributable to Preferred Shares (1,204 ) (1,204 ) Book Value Attributable to Common Shares 95,293 96,201 Goodwill and intangibles (737 ) (737 ) Book Value Attributable to Common Shares (Tangible)$ 94,556 $ 95,464 Outstanding common shares 5,225,042 5,168,681 Tangible Book Value Per Common Share $ 18.10$ 18.47 Cash and Cash Equivalents Total cash and cash equivalents decreased$15.9 million to$108.2 million atSeptember 30, 2022 from$124.1 million atDecember 31, 2021 , primarily due to the growth of loans exceeding the growth of customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will continue to hold adequate levels of liquid and short-term assets.
Our investment securities portfolio is classified as either AFS or HTM. The following table shows the amortized cost and fair value for our AFS and HTM investment portfolios at the dates indicated (in thousands).
September 30, 2022 December 31, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
Available for sale
U.S. government agencies $ 27,454 $ 25,227 $ 9,479 $ 9,439
State and municipal obligations 24,862 20,162 26,011 26,677
Mortgage-backed securities - agency 28,938 25,593 33,191 33,418
Collateralized mortgage obligations -
agency 23,537 21,782 26,968 27,435
Asset-backed securities 2,159 2,099 2,599 2,590
Corporate bonds 15,450 13,398 12,200 12,403
$ 122,400 $ 108,261 $ 110,448 $ 111,962
Held to maturity
U.S. government agencies $ 5,991 $ 5,799 $ - $ -
$ 5,991 $ 5,799 $ - $ -
AFS investment securities decreased $3.7 million , or 3.31%, to $108.3 million at
September 30, 2022 from $112.0 million at December 31, 2021 . During the nine
months ended September 30, 2022 , $3.3 million of AFS corporate bonds and $18.0
million of AFS U.S. government agencies were purchased. HTM investment
securities increased $6.0 million , to $6.0 million at September 30, 2022 from
zero million at December 31, 2021 . During the nine months ended September 30,
2022 , $6.0 million of HTM U.S. government agencies were purchased. We continue
to look for opportunities to re-deploy funds from investment securities to
higher yielding loans.
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Management of the Company believes all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.
The composition and maturities of the AFS and HTM investment securities portfolios atSeptember 30, 2022 are summarized in the following table (in thousands). Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The composition and maturity distribution of the securities portfolio is subject to change depending on rate sensitivity, capital, and liquidity needs. The weighted average yield for the month endedSeptember 30, 2022 was calculated using net income (interest accrual plus or minus accretion/amortization) divided by ending book value. More than one year More than five years Less than one year through five years through ten years More than ten years Total securities Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Available for saleU.S. government agencies $ - 0.00 %$ 17,973 1.46 %$ 9,481 1.31 % $ - 0.00 %$ 27,454 1.41 % State and municipal obligations - 0.00 % - 0.00 % 6,342 2.07 % 18,520 2.35 % 24,862 2.28 %
Mortgage-backed
securities - agency - 0.00 % 130 3.83 % 7,167 2.10 % 21,641 1.78 % 28,938 1.87 % Collateralized mortgage obligations - agency - 0.00 % - 0.00 % 12,186 2.45 % 11,351 1.90 % 23,537 2.18 % Asset-backed securities - 0.00 % - 0.00 % 436 2.93 % 1,723 3.27 % 2,159 3.20 % Corporate bonds - 0.00 % - 0.00 % 14,700 4.03 % 750 4.92 % 15,450 4.07 % Total securities available-for-sale $ - 0.00 %$ 18,103 1.48 %$ 50,312 2.60 %$ 53,985 2.09 %$ 122,400 2.21 % Held to maturityU.S. government agencies $ - 0.00 %$ 5,991 2.59 % $ - 0.00 % $ - 0.00 %$ 5,991 2.59 % Total securities held to maturity $ - 0.00 %$ 5,991 2.59 % $ - 0.00 % $ - 0.00 %$ 5,991 2.59 % Loans The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated (in thousands). Other construction and land loans include residential acquisition and development loans and loans on commercial undeveloped land and one-to-four family improved and unimproved lots. Commercial real estate loans include loans on non-residential owner-occupied and non-owner-occupied real estate, multi-family, and owner-occupied investment property. Commercial and industrial loans include unsecured commercial loans and commercial loans secured by business assets. 33 September 30, 2022 December 31, 2021 Balance Percent Balance Percent Real estate mortgage loans: One-to four-family residential$ 145,107 14.57$ 132,836 14.22 Commercial real estate 444,003 44.59 423,552 45.36 Home equity loans and lines of credit 21,970 2.21 21,568 2.31 Residential construction 37,927 3.81 38,881 4.16 Other construction and land 84,401 8.48 75,682 8.10 Commercial 255,817 25.69 234,355 25.09 Consumer 6,504 0.65 7,129 0.76 Loans receivable, gross 995,729 100.00 934,003 100.00 Net deferred loan costs (fees) (668 )
(528 )
Loans receivable, net of deferred fees$ 995,061 $
933,475
Commercial real estate loan balances contracted during year to date primarily due to significant paydowns of existing loans.
Included in commercial loans are PPP loans totaling zero and
Delinquent Loans
When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower is referred to the Bank'sCredit Administration staff to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank's counsel is instructed to pursue foreclosure. The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.
If a loan is modified in a troubled debt restructure ("TDR"), the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt. For a discussion of TDRs, see the section entitled "Troubled Debt Restructurings" below.
The following table sets forth certain information with respect to our loan portfolio carrying balances of delinquencies at the dates indicated (in thousands). We had no loans 90 days or more past due and still accruing interest as ofSeptember 30, 2022 . We had one loan 90 days or more past due that was still accruing interest as ofDecember 31, 2021 that was not 98% guaranteed by the issuing agency. The decrease in past due consumer loans is primarily attributable to the sale of the purchased student loan portfolio, the balance of which, as ofDecember 31, 2021 , was$0.7 million , and decreased to zero as
ofSeptember 30, 2022 . 34 Delinquent loans 90 Days and 30-59 Days 60-89 Days Over TotalSeptember 30, 2022
One-to-four family residential $ - $ - $
39$ 39 Commercial - 15 - 15 Total delinquent loans $ -$ 15 $ 39$ 54 Percent of total loans, net 0.00 % 0.00 % 0.00 % 0.01 %December 31, 2021
One-to-four family residential $ - $ - $
50$ 50 Commercial 54 - - 54 Consumer - - 590 590 Total$ 54 $ - $ 640$ 694 Percent of total loans, net 0.01 % 0.00 % 0.07 % 0.07 % Total delinquencies as a percentage of loans decreased from 0.07% atDecember 31, 2021 to 0.01% atSeptember 30, 2022 . Delinquent loans decreased$0.6 million , or 92.22%, to$0.1 million atSeptember 30, 2022 from$0.7 million atDecember 31, 2021 . We continue to focus on collection efforts and favorable
resolutions.
Nonperforming Assets
Nonperforming loans include all loans past due 90 days and over that are not 98%
guaranteed by the issuing agency, certain impaired loans, and TDR loans that
have not yet established a satisfactory period of payment performance (some of
which may be contractually current). Nonperforming assets include nonperforming
loans and other real estate owned ("REO"). The table below sets forth the
amounts and categories of our nonperforming assets at the dates indicated (in
thousands).
September 30, December 31,
2022 2021
Nonaccrual loans:
Real estate loans:
One-to-four family residential $ 61 $ 107
Commercial 291 767
Commercial 335 473
Consumer - 2
Total nonperforming loans 687 1,349
REO:
One-to-four family residential - -
Commercial real estate - -
Other construction and land 732 842
Total foreclosed real estate 732 842
Total nonperforming assets $ 1,419 $ 2,191
TDRs still accruing $ 1,650 $ 1,780
Ratios:Nonperforming loans to total loans 0.07 % 0.14 % Nonperforming assets to total assets 0.11 % 0.18 %
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The decrease in nonperforming loans and nonperforming assets is the result of the successful resolution and disposal of nonperforming loans and nonperforming assets by means of restructure, foreclosure, deed in lieu of foreclosure and sales. Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower's financial difficulties, we grant a concession that we would not otherwise consider, for other than an insignificant period of time, the related loan is classified as a TDR. We strive to identify borrowers in financial difficulty early so that we may work with them to modify their loans before they reach nonaccrual status. Modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates, periods of interest-only payments, and principal deferments. A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. While unusual, there may be instances of forgiveness of loan principal. We individually evaluate all substandard loans that experience a modification of terms to determine if a TDR has occurred. All TDRs over$200,000 are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and the ultimate collectability of all amounts contractually due is not in doubt. We may also remove a loan from TDR and impaired status if the loan is subsequently restructured and at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted to the borrower. Classification of Loans The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as "doubtful" or "loss" are charged off immediately (in thousands). September 30, December 31, 2022 2021 Classified loans: Substandard $ 2,904$ 4,304 Doubtful - - Loss - - Total classified loans: 2,904 4,304 Special mention 3,733 9,647 Total criticized loans $
6,637
Total classified loans as a % of total loans, net 0.29 % 0.46 % Total criticized loans as a % of total loans, net 0.67 % 1.49 %
Management continues to dedicate resources to monitoring and resolving classified and criticized loans.
Allowance for Loan Losses
The allowance for loan losses reflects our estimates of probable losses inherent
in our loan portfolio at the balance sheet date. The allowance for loan losses
is evaluated on a regular basis by management and is based upon management's
periodic review of the collectability of our loans in light of historical
experience, the nature and volume of our loan portfolio, adverse situations that
may affect our borrowers' abilities to repay, the estimated value of any
underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The methodology for
determining the allowance for loan losses has two main components: the
evaluation of individual loans for impairment and the evaluation of certain
groups of homogeneous loans with similar risk characteristics.
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A loan is considered impaired when it is probable that we will be unable to
collect all principal and interest payments due according to the original
contractual terms of the loan. We individually evaluate loans, or relationships,
greater than $200,000 for impairment that are classified as nonaccrual, TDRs, or
performing substandard loans. If the impaired loan is considered collateral
dependent, a charge-off is taken based upon the appraised value of the property
less an estimate of selling costs if foreclosure or sale of the property is
anticipated. If the impaired loan is not collateral dependent, a specific
reserve is established based upon an estimate of the future discounted cash
flows after consideration of modifications and the likelihood of future default
and prepayment.
The allowance for homogenous loans consists of a base loss reserve and a
qualitative reserve. The loss rates for the base loss reserve, segmented into
seven loan categories, contain average net loss rates ranging from approximately
0.00% to 0.54%.
The qualitative reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external factors:
· Changes in lending and loan review policies;
· Economic conditions - including unemployment rates, federal macroeconomic data,
housing prices and sales, and regional economic outlooks;
· Changes in the nature and volume of the portfolio and in the terms of the
loans;
· Experience, ability, and depth of lending management;
· Volume and severity of past due, nonaccrual, and classified loans;
· Changes in the quality of the institution's loan review system;
· Collateral values;
· Loan concentrations and loan growth; and
· The effect of other external factors such as competition, legal and regulatory
requirements on the level of estimated credit losses.
Qualitative reserve adjustment factors are decreased for favorable trends and
increased for unfavorable trends. There is no certainty that our allowance for
loan losses will be appropriate over time to cover losses in our portfolio as
economic and market conditions may ultimately differ from our reasonable and
supportable forecast.
The following table summarizes the net charge-off (recovery) detail as a
percentage of average loans by loan composition for the periods indicated (in
thousands).
Nine Months Ended September 30,
2022 2021
Charge-Off Charge-Off
(Recovery) Percent (Recovery) Percent
Real Estate:One-to-four family residential$ (109 ) -0.06 % $ 9 0.01 % Commercial real estate (53 ) -0.01 % 52 0.01 % Home equity loans and lines of credit - 0.00 % - 0.00 % Residential construction - 0.00 % - 0.00 % Other construction and land (19 ) -0.02 %
(17 ) -0.02 %
Commercial 802 0.26 % (157 ) -0.05 %
Consumer 10 0.11 % - 0.00 %
Total $ 631 $ (113 )
Ratios:
Net charge-offs (recoveries) to
average loans outstanding 0.07 % (0.01 )%
Allowance to nonperforming loans at
period end(1) 2,122.13 % 1,190.81 %
Allowance to total loans at period end 1.47 % 1.47 %
(1) At
nonaccrual loans.
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Our allowance as a percentage of total loans held steady at 1.47% at September
30, 2022 , consistent with 1.47% at December 31, 2021 and September 30, 2021 .
Despite decreases in historic charge off rates and qualitative adjustments, our
CarBucks loan portfolio, which holds a higher allowance ratio, grew at a faster
rate than that of the Core Bank during the interim period. With these changes,
the overall results of the allowance to total loans ratio remained unchanged.
We have continued to experience limited charge-off amounts and stable
collections of amounts previously charged-off. The overall historical loss rate
used in our allowance for loan losses calculation continues to decline as
previous quarters with larger loss rates are eliminated from the calculation as
time passes. Our coverage ratio of nonperforming loans increased to 2,122.13% at
September 30, 2022 from 1,017.27% at December 31, 2021 primarily as the result
of the decreased balance of nonperforming loans during the period.
Deposits
The following table presents deposits by category and percentage of total deposits as of the periods indicated (in thousands).
September 30, 2022 December 31, 2021
Balance Percent Balance Percent
Noninterest-bearing demand $ 319,193 28.8 $ 280,665 26.5
Interest-bearing demand 59,949 5.4 52,479 5.0
Money Market 539,532 48.5 500,862 47.3
Savings 17,514 1.6 16,106 1.5
Time Deposits 173,819 15.7 208,929 19.7
$ 1,110,007 100.0 $ 1,059,041 100.0
At September 30, 2022 and December 31, 2021 , we estimate that we have
approximately $457.1 million and $393.8 million , respectively, in uninsured
deposits including related interest accrued and unpaid. Since it is not
reasonably practicable to provide a precise measure of uninsured deposits, these
amounts are estimates and are based on the same methodologies and assumptions
used for the Bank's regulatory reporting requirements by the FDIC for the Call
Report.
As indicated in the above table, deposit balances increased approximately $51.0
million , or 4.81%, for the nine months ended September 30, 2022 compared to
December 31, 2021 . The increase in total deposits was mainly attributable to the
$38.7 million , or 7.72%, increase in money market accounts, the $7.5 million , or
14.23%, increase in interest-bearing demand accounts and $38.5 million , or
13.73%, increase in noninterest-bearing demand accounts, partially offset by a
$35.1 million , or 16.80%, decline in time deposits.
Discussion of Results of Operation
Comparison of the Three Months Ended
General Net income for the three months endedSeptember 30, 2022 was$4.4 million , compared to$3.8 million for the same period in 2021. The increase in net income for the period was primarily the result of increases in net interest income of$1.9 million , partially offset by an increase in provision expense of$0.6 million and noninterest expense totaling$0.6 million . Of noninterest expenses during third quarter,$0.1 million is related to the Company's pending merger withFirst Bancorp . Net Interest Income
Net interest income increased$1.9 million , or 15.00%, to$14.7 million for the three months endedSeptember 30, 2022 , compared to$12.8 million for the same period in 2021. The increase in net interest income was primarily due to higher volumes in loans (bothCore Bank and CarBucks) and yields onCore Bank loans, funds sold and other interest earning deposits. This was partially offset by the decline in yields on our CarBucks loans and the increase in money market account interest rates. The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs that are amortized or accreted to interest income or expense. 38 For the Three Months Ended September 30, 2022 2021 Average Average Outstanding Outstanding Balance Interest Yield/ Rate Balance Interest Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans, Core Bank(1)$ 864,217 $ 9,884 4.54 %$ 835,818 $ 8,748 4.15 % Loans, Carbucks(2) 110,010 5,291 19.08 % 92,110 4,754 20.48 % Investments - taxable 110,397 631 2.27 % 117,879 389 1.32 % Investments - tax exempt(3) 10,866 87 3.18 % 12,738 88 2.76 % Federal funds sold and other interest earning deposits 130,887 654 1.98 % 81,085 27 0.13 % Other investments, at cost 2,553 19 2.95 % 4,147 23 2.22 % Total interest-earning assets 1,228,930 16,566 5.35 % 1,143,777 14,029 4.87 % Noninterest-earning assets 38,449 36,627 Total assets$ 1,267,379 $ 1,180,404 Interest-bearing liabilities: Savings accounts$ 17,631 $ 4 0.09 %$ 13,437 $ 3 0.10 % Time deposits 176,577 144 0.32 % 234,642 221 0.37 % Money market accounts 554,991 1,185 0.85 % 453,974 487 0.43 % Interest bearing transaction accounts 60,057 28 0.18 % 68,525 45 0.26 % Total interest bearing deposits 809,256 1,361 0.67 % 770,578 756 0.39 % FHLB advances 5,000 5 0.40 % 16,000 36 0.89 % Junior subordinated debentures 35,936 477 5.27 % 35,816 431 4.78 % Other borrowings - - 0.00 % - - 0.00 % Total interest-bearing liabilities 850,192 1,843 0.86 % 822,394 1,223 0.59 % Noninterest-bearing deposits 312,123 260,396 Other non interest bearing liabilities 5,979 5,537 Total liabilities 1,168,294 1,088,327 Total equity 99,085 92,077 Total liabilities and equity$ 1,267,379 $ 1,180,404 Tax-equivalent net interest income$ 14,723 $ 12,806 Net interest-earning assets(4)$ 378,738
Average interest-earning assets to interest-bearing liabilities 144.55 %
139.08 %
Tax-equivalent net interest
rate spread(5) 4.49 % 4.28 %
Tax-equivalent net interest
margin(6) 4.75 % 4.44 %
(1)
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
and 2021, respectively. (4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities. (5) Tax-equivalent net interest rate spread represents the difference between the
tax equivalent yield on average interest-earning assets and the cost of
average interest-bearing liabilities. (6) Tax-equivalent net interest margin represents tax equivalent net interest
income divided by average total interest-earning assets.
39
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based
on the absolute values of changes due to rate and the changes due to volume.
For the
Three Months Ended
Compared to
the Three Months Ended
Increase (decrease) due to:
(In thousands) Volume Rate Total
Interest-earning assets:
Loans - Core Bank(1) $ 305 $ 831 $ 1,136
Loans - CarBucks(1) 877 (340 ) 537
Investment - taxable (26 ) 268 242Investments - tax exempt(2) (14 ) 13 (1 ) Interest-earning deposits 26 601 627 Other investments, at cost (10 ) 6 (4 ) Total interest-earning assets 1,158 1,379 2,537 Interest-bearing liabilities: Savings accounts 1 - 1 Time deposits (50 ) (27 ) (77 ) Money market accounts 128 570 698
Interest bearing transaction accounts (5 ) (12 ) (17 ) FHLB advances (17 ) (14 ) (31 ) Junior subordinated debentures 1 45 46 Other borrowings - - - Total interest-bearing liabilities 58 562 620 Change in tax-equivalent net interest income $ 1,100 $ 817$ 1,917
(1) Nonaccrual loans are included in the above analysis.
(2) Interest income on tax exempt loans and investments are adjusted for based on
a 21% federal tax rate.
Net interest income before provision for loan losses increased to$14.7 million for the three months endedSeptember 30, 2022 , compared to$12.8 million for the same period in 2021, due to improvements in volume and interest rates. The increase in tax-equivalent net interest income of$1.1 million related to volume was primarily the result of higher average loan balances (bothCore Bank and CarBucks) which increased$46.3 million , and a$58.1 million decrease in average time deposits for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of$101.0 million in money market balances. The increase in tax-equivalent net interest income of$0.8 million related to rate was primarily the result of increased yields onCore Bank loans, interest earning deposits and taxable investments, partially offset by decreased yields on CarBucks loans and increased rates on money market accounts.
Our tax-equivalent net interest margin was 4.75% for the three months ended
Provision for Loan Losses We recorded a provision for loan losses for the three months endedSeptember 30, 2022 of$1.1 million due to organic loan growth and net charge off activity. This compares to a$0.5 million provision for loan losses in for the same period in 2021. We are experiencing continued stabilization in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions, labor shortages, price inflation and the associated impact on monetary policy, there is a risk that loss rates could increase. 40 Noninterest Income The following table summarizes the components of noninterest income and the corresponding changes between the three months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended September 30, 2022 2021 Change
Service charges on deposit accounts $ 380
$ 320 $ 60
Investment securities loss (27 ) - (27 )
Bank owned life insurance 80 84 (4 )Net gain on sale of premises and equipment 30
6 24
Other noninterest income 207 248 (41 )
Total noninterest income $ 670 $ 658 $ 12 Our noninterest income increased less than$0.1 million to$0.7 million in the three months endedSeptember 30, 2022 , compared to the same period in 2021 due primarily to increase in service charges on deposit accounts, partially off set by decreases in other noninterest income.
Noninterest Expense
The following table summarizes the components of noninterest expense and the corresponding change between the three months endedSeptember 30, 2022 and
2021
(in thousands):
Three Months Ended September 30,
2022 2021 ChangeCompensation and employee benefits $ 5,771
$ 5,367 $ 404
Net occupancy 574 584 (10 )
Federal deposit insurance 128 157 (29 )
Professional and advisory 174 314 (140 )
Merger expenses 143 - 143
Data processing 579 509 70
Marketing and advertising 45 49 (4 )Net cost of operation of real estate owned 1
11 (10 )
Other noninterest expense 1,060 916 144
Total noninterest expenses $ 8,475 $ 7,907 $ 568 Our noninterest expense increased$0.6 million to$8.5 million in the three months endedSeptember 30, 2022 , compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of$0.4 million , other noninterest expense of$0.1 million , and merger expenses of$0.1 million , partially offset by a decrease in professional and advisory expenses of$0.1 million . The increase in compensation and employee benefits is primarily related to annual raises and increases in employee benefits, incentives and
commissions. Income Taxes Income tax expense totaled$1.4 million for the three months endedSeptember 30, 2022 , compared to$1.2 million for the same period in 2021. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 24.3% and 24.0% for the three months endedSeptember 30, 2022 and 2021, respectively.
We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.
Discussion of Segment Results for the Quarter
See Note 9, "Reportable Segments" in notes to the consolidated financial statements included under Item 1 -"Financial Statements" for additional disclosures related to our reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the "Noninterest income" and "Noninterest expense" sections above.
41
Comparison of the Three Months Ended
As of and for the Three
Months Ended
Core Bank CarBucks Other Total
Interest income $ 10,555 $ 5,291 $ 702 $ 16,548
Interest expense 203 1,163 477 1,843
Net interest income 10,352 4,128 225 14,705
Provision for loan losses 334 726 - 1,060
Noninterest income 543 74 53 670
Noninterest expense 5,521 2,792 162 8,475
Net income before taxes 5,040 684 116 5,840
Income tax expense 1,224 170 27 1,421
Net income $ 3,816 $ 514 $ 89 $ 4,419
Total assets $ 1,013,895 $ 110,431 $ 129,641 $ 1,253,967
As of and for the Three
Months Ended
Core Bank CarBucks Other Total
Interest income $ 8,795 $ 4,754 $ 461 $ 14,010
Interest expense 418 374 431 1,223
Net interest income 8,377 4,380 30 12,787
Provision for loan losses 386 108 - 494
Noninterest income 443 38 177 658
Noninterest expense 5,409 2,487 11 7,907
Net income before taxes 3,025 1,823 196 5,044
Income tax expense 726 436 48 1,210
Net income $ 2,299 $ 1,387 $ 148 $ 3,834
Total assets $ 970,034 $ 90,434 $ 142,199 $ 1,202,667
Core Bank
Core Bank consists of commercial and consumer lending and full-service branches
in its geographic region with its own management team. The branches provide a
full range of traditional banking products as well as treasury services and
merchant services.
Core Bank net income increased $1.5 million to $3.8 million for the three months
ended September 30, 2022 compared to $2.3 million for the same period in 2021.
Net interest income increased $2.0 million to $10.4 million for the three months
ended September 30, 2022 from $8.4 million for the same period a year ago
primarily due to increased volume of Core Bank Loans and increased yields on
Core Bank loans, taxable investments and interest bearing deposits, partially
offset by an increase in interest rates on money market accounts. Provision for
loan losses decreased $0.1 million for the three months ended September 30, 2022
compared to 2021 due to higher net recovery activity, partially offset by
organic loan growth during the third quarter of 2022 as compared to the third
quarter of 2021. Noninterest expense increased $0.1 million to $5.5 million for
the 2022 period compared to $5.4 million for the same period in 2021 due
primarily to an increase in compensation and employee benefits expense.
CarBucks
CarBucks provides specialty floor plan inventory financing for more than 1,600
small automobile dealers in over 20 states. Credit lines are established for
each approved dealer using our Board approved underwriting guidelines. Advances
and repayments on credit lines averaging $0.1 million are vehicle specific.
During the three-month period, the inventory typically consists of over 12,000
floored used vehicles with an average price of $8,400 per unit, generally has an
average 70-day turnover, and generates approximately $300 in financing fees per
vehicle which is included in loan interest income.
42
CarBucks net income decreased $0.9 million to $0.5 million for the three months
ended September 30, 2022 compared to $1.4 million for the same three-month
period in 2021. Net interest income decreased $0.3 million to $4.1 million for
the 2022 period from $4.4 million for the same period a year ago primarily due
to increased interest expense and lower fees related to inventory, partially
offset by increased volume of CarBucks loans. Provision for loan losses
increased $0.6 million for the three months ended September 30, 2022 compared to
2021 due to higher net charge offs during the third quarter of 2022 as compared
to the same period in 2021 and, partially offset by slower loan growth in the
third quarter of 2022 as compared to that in the same period in 2021.
Noninterest expense increased $0.3 million to $2.8 million for the 2022 period
compared to $2.5 million for the same period in 2021 due primarily to an
increase in compensation and employee benefits expense in 2022.
Other
Other includes parent company transactions, investment securities portfolio,
BOLI, excess death benefits, net intercompany eliminations, and certain other
activities not currently allocated to the aforementioned segments.
Other net income decreased $0.1 million to $0.1 million for the three months
ended September 30, 2022 compared to the same period in 2021 primarily due to an
increase in noninterest expense, specifically merger expenses related to our
pending merger with First Bancorp , partially offset by increased interest income
related to our taxable investments.
Comparison of the Nine Months Ended
General
Net income for the nine months ended
Net Interest Income
Net interest income increased$4.2 million , or 11.25%, to$41.1 million for the nine months endedSeptember 30, 2022 , compared to$37.0 million for the same period in 2021. The increase in net interest income was primarily due a higher volume of loans (bothCore Bank and CarBucks), yields onCore Bank loans, taxable investments and interest-earning deposits and decreases in the cost of time deposits. This was partially offset by the decline in CarBucks loans and increase in the balance and costs of money market accounts. The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs that are amortized or accreted to interest income or expense. 43 For the Nine Months Ended September 30, 2022 2021 Average Average Outstanding Outstanding Balance Interest Yield/ Rate Balance Interest Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans, Core Bank(1)$ 841,677 $ 26,719 4.24 %$ 820,177 $ 25,670 4.18 % Loans, Carbucks(2) 108,988 15,802 19.38 % 87,504 13,879 21.21 % Investments - taxable 110,204 1,630 1.98 % 112,538 1,015 1.21 % Investments - tax exempt(3) 11,412 262 3.07 % 12,708 265 2.78 % Federal funds sold and other interest earning deposits 133,897 911 0.91 % 71,678 69 0.13 % Other investments, at cost 2,687 48 2.39 % 5,118 88 2.30 % Total interest-earning assets 1,208,865 45,372 5.02 % 1,109,723 40,986 4.94 % Noninterest-earning assets 36,544 37,046 Total assets$ 1,245,409 $ 1,146,769 Interest-bearing liabilities: Savings accounts$ 16,966 $ 13 0.10 %$ 12,301 $ 9 0.10 % Time deposits 190,608 444 0.31 % 252,665 1,012 0.54 % Money market accounts 540,039 2,271 0.56 % 427,296 1,401 0.44 % Interest bearing transaction accounts 57,162 78 0.18 % 66,654 130 0.26 % Total interest bearing deposits 804,775 2,806 0.47 % 758,916 2,552 0.45 % FHLB advances 5,000 15 0.40 % 16,000 107 0.89 % Junior subordinated debentures 35,907 1,360 5.06 % 35,787 1,296 4.84 % Other borrowings - - 0.00 % 135 - 0.00 % Total interest-bearing liabilities 845,682 4,181 0.66 % 810,838 3,955 0.65 % Noninterest-bearing deposits 295,465 241,491 Other non interest bearing liabilities 5,894 5,605 Total liabilities 1,147,041 1,057,934 Total equity 98,368 88,835 Total liabilities and equity$ 1,245,409 $ 1,146,769 Tax-equivalent net interest income$ 41,191 $ 37,031 Net interest-earning assets(4)$ 363,183
Average interest-earning assets to interest-bearing liabilities 142.95 %
136.86 %
Tax-equivalent net interest
rate spread(5) 4.36 % 4.29 %
Tax-equivalent net interest
margin(6) 4.56 % 4.46 %
(1)
lending products and services to commercial and retail banking clients. (2) Carbucks is the bank's division that provides specialty floor plan lending to
small automobile dealers in over 20 states. (3) Tax exempt investments are calculated giving effect to a 21% federal tax
rate, or
2021, respectively. (4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities. (5) Tax-equivalent net interest rate spread represents the difference between the
tax equivalent yield on average interest-earning assets and the cost of
average interest-bearing liabilities. (6) Tax-equivalent net interest margin represents tax equivalent net interest
income divided by average total interest-earning assets.
44
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based
on the absolute values of changes due to rate and the changes due to volume.
For the
Nine Months Ended
Compared to
the Nine Months Ended
Increase (decrease) due to:
(In thousands) Volume Rate Total
Interest-earning assets:
Loans - Core Bank(1) $ 679 $ 370 $ 1,049
Loans - CarBucks(1) 3,191 (1,268 ) 1,923
Investment - taxable (21 ) 636 615
Investments - tax exempt(2) (28 ) 25 (3 )
Interest-earning deposits 105 737 842
Other investments, at cost (43 ) 3 (40 )Total interest-earning assets 3,883 503 4,386 Interest-bearing liabilities: Savings accounts 4 - 4 Time deposits (210 ) (358 ) (568 ) Money market accounts 420 450 870
Interest bearing transaction accounts (17 ) (35 ) (52 ) FHLB advances (51 ) (41 ) (92 ) Junior subordinated debentures 4 60 64 Other borrowings - - - Total interest-bearing liabilities 150 76 226 Change in tax-equivalent net interest income $ 3,733 $ 427$ 4,160
(1) Nonaccrual loans are included in the above analysis. (2) Interest income on tax exempt loans and investments are adjusted for based on
a 21% federal tax rate.
Net interest income before provision for loan losses increased to$41.2 million for the nine months endedSeptember 30, 2022 , compared to$37.0 million for the same period in 2021, due to improvements in volume and interest rates. The increase in tax-equivalent net interest income of$3.7 million related to volume was primarily the result of higher average loan (bothCore Bank and CarBucks) which increased$43.0 million , and a$62.1 million decrease in average time deposits for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of$112.7 million in money market balances. The increase in tax-equivalent net interest income of$0.4 million related to rate was primarily the result of increased yields onCore Bank loans, interest-earning deposits and taxable investments and decreased costs on time deposits, partially offset by decreased yields on CarBucks loans and increased costs on money market accounts. Our tax-equivalent net interest margin was 4.56% for the nine months endedSeptember 30, 2022 , compared to 4.46% for the same period in 2021, an increase of 10 basis points. The increase in net interest margin was primarily attributable to higher average loan balances (bothCore Bank and CarBucks) and higher yields onCore Bank loans, taxable investments and interest-bearing deposits, partially offset by lower yields on CarBucks loans.
Provision for Loan Losses
We recorded a provision for loan losses for the nine months endedSeptember 30, 2022 of$1.5 million due to organic loan growth, net charge off activity and certain qualitative adjustments. This compares to a$1.0 million provision for loan losses in for the same period in 2021. We are experiencing continued stabilization in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions, labor shortages, price inflation and the associated impact on monetary policy, there is a risk that loss rates could
increase.
45
Noninterest Income
The following table summarizes the components of noninterest income and the
corresponding changes between the nine months ended September 30, 2022 and 2021
(in thousands):
Nine Months Ended September 30,
2022 2021 ChangeService charges on deposit accounts $ 1,082
$ 910 $ 172
Investment securities loss (27 ) - (27 )
Bank owned life insurance 236 261 (25 )Net gain on sale of premises and equipment 66
90 (24 )
Other noninterest income 576 740 (164 )
Total noninterest income $ 1,933 $ 2,001 $ (68 )
Our noninterest income decreased $0.1 million to $1.9 million in the nine months
ended September 30, 2022 , compared to the same period in 2021, due primarily to
decreases in other noninterest income, partially offset by an increase in
service charges on deposit accounts.
Noninterest Expense
The following table summarizes the components of noninterest expense and the corresponding change between the nine months endedSeptember 30, 2022 and 2021 (in thousands): Nine Months Ended September 30, 2022 2021 Change
Compensation and employee benefits$ 16,987 $ 15,428 $ 1,559 Net occupancy 1,730 1,732 (2 ) Federal deposit insurance 345 482 (137 ) Professional and advisory 686
888 (202 )
Merger expenses 1,039 - 1,039
Data processing 1,593 1,536 57Marketing and advertising 157 128 29 Net cost of operation of real estate owned 38 140 (102 ) Other noninterest expense 2,912 2,643 269 Total noninterest expenses$ 25,487
Our noninterest expense increased$2.5 million to$25.5 million in the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of$1.6 million , increases in merger expenses of$1.0 million and increases in other noninterest expenses of$0.3 million . The increase in compensation and employee benefits is primarily related to annual raises and increases in employee benefits, incentives and commissions. Merger expenses related to our pending merger withFirst Bancorp . Income Taxes
Income tax expense totaled$3.9 million for the nine months endedSeptember 30, 2022 , compared to$3.6 million for the same period in 2021. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 24.1% and 23.8% for the nine months endedSeptember 30, 2022 and 2021, respectively.
We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.
Discussion of Segment Results Year-to Date through
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.
46
Comparison of the Nine Months Ended
As of and for the Nine
Months Ended
Core Bank CarBucks Other Total
Interest income $ 27,673 $ 15,802 $ 1,842 $ 45,317
Interest expense 413 2,408 1,360 4,181
Net interest income 27,260 13,394 482 41,136
Provision for loan losses 167 1,320 - 1,487
Noninterest income 1,528 195 210 1,933
Noninterest expense 16,136 8,257 1,094 25,487
Net income before taxes 12,485 4,012 (402 ) 16,095
Income tax expense 3,006 966 (97 ) 3,875
Net income $ 9,479 $ 3,046 $ (305 ) $ 12,220
Total assets $ 1,013,895 $ 110,431 $ 129,641 $ 1,253,967
As of and for the Nine
Months Ended
Core Bank CarBucks Other Total
Interest income $ 25,823 $ 13,879 $ 1,228 $ 40,930
Interest expense 1,580 1,079 1,296 3,955
Net interest income 24,243 12,800 (68 ) 36,975
Provision for loan losses 977 68 - 1,045
Noninterest income 1,561 112 328 2,001
Noninterest expense 15,568 7,362 47 22,977
Net income before taxes 9,259 5,482 213 14,954
Income tax expense 2,206 1,306 51 3,563
Net income $ 7,053 $ 4,176 $ 162 $ 11,391
Total assets $ 970,034 $ 90,434 $ 142,199 $ 1,202,667
Core Bank
Core Bank consists of commercial and consumer lending and full-service branches
in its geographic region with its own management team. The branches provide a
full range of traditional banking products as well as treasury services and
merchant services.
Core Bank net income increased $2.4 million to $9.5 million for the nine months
ended September 30, 2022 compared to $7.1 million for the same period in 2021.
Net interest income increased $3.0 million to $27.3 million for the nine months
ended September 30, 2022 from $24.2 million for the same period a year ago
primarily due to increased volume of Core Bank Loans, decrease volume of time
deposits and increased yields on Core Bank loans, taxable investments and
interest bearing deposits, partially offset by increased volume and rates on
money market accounts. Provision for loan losses decreased $0.8 million for the
nine months ended September 30, 2022 compared to 2021 due to lower loan growth,
lower historic net charge off activity, lower qualitative adjustments to the
allowance for loan losses and higher net recovery activity in the nine months
ended September 30, 2022 as compared to the same period in 2021. Noninterest
expense increased $0.6 million to $16.1 million for the 2022 period compared to
$15.6 million for the same period in 2021 due primarily to an increase in
compensation and employee benefits expense and merger expenses in 2022 related
to the Company's pending merger with First Bancorp .
CarBucks
CarBucks provides specialty floor plan inventory financing for more than 1,600
small automobile dealers in over 20 states. Credit lines are established for
each approved dealer using our Board approved underwriting guidelines. Advances
and repayments on credit lines averaging $0.1 million are vehicle specific.
During the nine-month period, the inventory typically consists of over 12,000
floored used vehicles with an average price of $8,300 per unit, generally has an
average 68-day turnover, and generates approximately $300 in financing fees per
vehicle which is included in loan interest income.
47
CarBucks net income decreased $1.1 million to $3.0 million for the nine months
ended September 30, 2022 compared to $4.2 million for the same nine-month period
in 2021. Net interest income increased $0.6 million to $13.4 million for the
nine months ended September 30, 2022 compared to $12.8 million for the same
period a year ago primarily due to increased inventory and interest expense,
partially offset by decreased fees on inventory. Provision for loan losses
increased $1.3 million for the nine months ended September 30, 2022 compared to
the same period in 2021 due to increased net charge offs and higher loan
balance, partially offset by lower qualitative adjustments. Noninterest expense
increased $0.9 million to $8.3 million for the nine months ended September 30,
2022 compared to $7.4 million for the same period in 2021 due primarily to
increases in compensation and employee benefits expense and other noninterest
expense in 2022.
Other
Other includes parent company transactions, investment securities portfolio,
BOLI, excess death benefits, net intercompany eliminations, and certain other
activities not currently allocated to the aforementioned segments.
Other net income decreased $0.5 million to a loss of $0.3 million for the nine
months ended September 30, 2022 compared to the same period in 2021 primarily
due to increased noninterest expense, partially offset by an increase in
interest income related to our taxable investments and interest earning
deposits. Of the noninterest expense, $1.0 million was related to the merger
with First Bancorp .
Liquidity and Capital Resources
Liquidity and Market Risk. Our primary sources of funds consist of deposit inflows, loan repayments, advances from theFederal Home Loan Bank of Atlanta ("FHLB"), and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ALCO, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We believe that, as ofSeptember 30, 2022 , we have enough sources of liquidity to satisfy our liquidity needs for the next twelve months and thereafter. We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally inFHLB andFederal Reserve Bank of Richmond ("FRB") interest-earning deposits and investment securities and are also used to pay off short-term borrowings. AtSeptember 30, 2022 , cash and cash equivalents totaled$108.2 million . Included in this total was$73.0 million held at the FRB,$0.5 million held at the FHLB, and$29.5 million held at correspondent banks in interest-earning accounts. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources and uses of liquidity during the nine months endedSeptember 30, 2022 and 2021 (in thousands): Nine Months Ended September 30, 2022 2021 Investing activities: Purchases of investments$ (27,232 ) $ (38,520 ) Maturities and principal repayments of investments 8,179 19,645 Net increase in loans (62,508 ) (58,436 ) Financing activities: Net increase in deposits $ 50,966$ 105,257 Repurchase of common stock
- (3,946 )
48
In addition, because the Company is a separate entity from the Bank, it must
provide for its own liquidity. The Company is responsible for payment of
dividends declared on its common and preferred stock and interest and principal
on any outstanding debt or trust preferred securities. The Company currently has
internal capital resources to meet these obligations. While the Company has
access to capital, the ultimate sources of its liquidity are dividends from the
Bank and tax allocation agreements, which are limited by applicable law and
regulations. The Bank paid no dividends to the Company in the nine months ended
September 30, 2022 or 2021.
At
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 asSeptember 30, 2022 . In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows. Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with the FHLB. The following summarizes our borrowing capacity as ofSeptember 30, 2022 (in thousands): Total Used Unused Capacity Capacity Capacity FHLB Loan collateral capacity$ 371,108 Pledgeable marketable securities 113,752 FHLB totals 484,860$ 5,000 $ 479,860 Fed funds lines 49,000 - 49,000$ 533,860 $ 5,000 $ 528,860 Capital Resources. Shareholders' equity decreased$0.9 million to$96.5 million atSeptember 30, 2022 compared to$97.4 million atDecember 31, 2021 . This decrease was primarily attributable to after-tax decreases in market value of AFS investment securities of$12.2 million and dividends declared of$2.1 million offset by net income of$12.2 million , stock-based compensation of$0.4 million , and stock options exercised of$0.8 million . 49
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
To Be Well-Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes (1) Provisions
Amount Ratio Amount Ratio Amount Ratio
As of September 30,
2022:
Tier 1 Leverage
Capital $ 136,682 10.79 % $ 50,651 >4.0 % $ 63,314 >5.0 %
Common Equity Tier 1
Capital $ 136,682 12.62 % $ 75,806 >7.0 % $ 70,391 >6.5 %
Tier 1 Risk-based
Capital $ 136,682 12.62 % $ 92,050 >8.5 % $ 86,635 >8.0 %
Total Risk-based
Capital $ 150,232 13.87 % $ 113,709 >10.5 %$ 108,294 >10.0 % As of December 31, 2021: Tier 1 Leverage
Capital$ 123,344 10.21 %$ 48,317 >4.0 %$ 60,396 >5.0 % Common Equity Tier 1 Capital$ 123,344 12.24 %$ 70,517 >7.0 %$ 65,480 >6.5 % Tier 1 Risk-based Capital$ 123,344 12.24 %$ 85,628 >8.5 %$ 80,591 >8.0 % Total Risk-based Capital$ 135,951 13.50 %$ 105,776
>10.5 %
(1) Includes capital conservation buffer of 2.50%.
The tables below summarize the capital amounts and ratios of the Company and the minimum(1) regulatory requirements in accordance with Basel III atSeptember 30, 2022 , andDecember 31, 2021 (in thousands). For Capital Adequacy Actual Purposes (2) Amount Ratio Amount Ratio As ofSeptember 30, 2022 : Tier I Leverage Capital$ 115,062 8.86 %$ 50,666 >4.0 % Common Equity Tier 1 Capital$ 106,814 9.92 %$ 75,873 >7.0 % Tier I Risk-based Capital$ 115,062 10.72 %$ 92,132 >8.5 %Total Risk Based Capital $ 156,331 14.64 %$ 113,810 >10.5 % As ofDecember 31, 2021 : Tier I Leverage Capital$ 103,730 8.59 %$ 48,327 >4.0 % Common Equity Tier 1 Capital$ 95,482 9.47 %$ 70,574 >7.0 % Tier I Risk-based Capital$ 103,730 10.29 %$ 85,696 >8.5 %Total Risk Based Capital $ 143,963 14.28 %$ 105,860 >10.5 %
(1) Under the
Company is not subject to the minimum capital adequacy and capital
conservation buffer capital requirements at the holding company level, unless
otherwise advised by the FRB (such capital requirements are applicable only
at the Bank level). Although the minimum regulatory capital requirements are
not applicable to the Company, we calculate these ratios for our own planning
and monitoring purposes.
(2) Includes capital conservation buffer of 2.50%.
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