GRANDSOUTH BANCORPORATION - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2021

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to _____

Commission File Number: 000-31937

GrandSouth Bancorporation

(Exact name of registrant as specified in its charter)


South Carolina	57-1104394
(State or other jurisdiction of incorporation or organization)	(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)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
None	None	None

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or an emerging growth 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On November 12, 2021, 5,150,681 shares of the issuer’s common stock, no par value, were issued and outstanding.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

FORM 10-Q

TABLE OF CONTENTS

		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets – September 30, 2021 and December 31, 2020	3
	Consolidated Statements of Income – Three and Nine Months Ended September 30, 2021 and 2020	4
	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2021 and 2020	5
	Consolidated Statements of Changes in Shareholders’ Equity – Three and Nine Months Ended September 30, 2021 and 2020	6
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
	Signatures	55

Item 1. Financial Statements

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

	(Unaudited)			(Audited)
	September 30,			December 31,
(in thousands, except share data)	2021			2020
Assets

Cash and due from banks	$	5,853		$	6,216
Interest-earning deposits		95,018			51,137
Federal funds sold		1,215			5,672
Cash and cash equivalents		102,086			63,025
Investments - available for sale		127,252			110,707
Other investments, at cost		3,476			6,252
Loans receivable, net of deferred fees and costs		937,093			878,545
Allowance for loan losses		(13,730	)		(12,572	)
Premises and equipment, net		17,504			16,680
Other real estate owned		1,395			1,932
Accrued interest receivable		5,822			5,704
Bank owned life insurance		14,694			14,861
Net deferred tax asset		2,811			2,501
Goodwill		737			737
Other assets		3,527			1,407
Total assets	$	1,202,667		$	1,089,779

Liabilities and Shareholders’ Equity

Liabilities:
Deposits:
Noninterest-bearing	$	268,858		$	203,502
Interest-bearing		782,879			742,978
Total deposits		1,051,737			946,480
Federal Home Loan Bank advances		16,000			16,000
Junior subordinated notes		35,834			35,744
Accrued interest payable		629			336
Accrued expenses and other liabilities		5,748			4,694
Total liabilities		1,109,948			1,003,254

Commitments and contingencies (Note 6)

Shareholders’ Equity:
Preferred stock-no par value; 20,000,000 shares authorized; Series A; 283,287 and 287,895 shares issued and outstanding		—			—
Common stock-no par value; 20,000,000 shares authorized; 5,148,681 and 5,271,971 shares issued and outstanding		—			—
Additional paid in capital		44,206			46,645
Retained earnings		47,471			37,721
Accumulated other comprehensive income		1,042			2,159
Total shareholders’ equity		92,719			86,525

Total liabilities and shareholders’ equity	$	1,202,667		$	1,089,779

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2021			2020			2021			2020
Interest income:
Interest and fees on loans	$	13,502		$	11,356		$	39,549		$	35,766
Taxable securities		389			293			1,015			947
Tax-exempt securities		69			70			209			130
Interest-earning deposits		27			13			69			102
Other		23			46			88			175
Total interest income		14,010			11,778			40,930			37,120

Interest expense:
Deposits		756			1,511			2,552			6,225
Federal Home Loan Bank advances		36			39			107			120
Junior subordinated notes		431			217			1,296			703
Other borrowings		—			1			—			6
Total interest expense		1,223			1,768			3,955			7,054
Net interest income		12,787			10,010			36,975			30,066
Provision for loan losses		494			798			1,045			2,537
Net interest income after provision for loan losses		12,293			9,212			35,930			27,529

Noninterest income:
Service charges on deposit accounts		320			263			910			719
Gain on sale of investment securities available for sale		—			—			—			392
Bank owned life insurance		84			109			261			313
Net gain on sale of premises and equipment		6			7			90			15
Other		248			183			740			521
Total noninterest income		658			562			2,001			1,960

Noninterest expenses:
Compensation and employee benefits		5,367			4,940			15,428			15,140
Net occupancy		584			570			1,732			1,655
Federal deposit insurance		157			129			482			360
Professional and advisory		314			317			888			951
Data processing		509			534			1,536			1,378
Marketing and advertising		49			29			128			115
Net cost of operation of other real estate owned		11			20			140			293
Other		916			682			2,643			2,358
Total noninterest expenses		7,907			7,221			22,977			22,250
Income before taxes		5,044			2,553			14,954			7,239
Income tax expense		1,210			665			3,563			1,804

Net income		3,834			1,888			11,391			5,435
Preferred stock dividends		(30	)		(25	)		(90	)		(73	)
Net income applicable to common shareholders	$	3,804		$	1,863		$	11,301		$	5,362

Earnings per common share:
Basic	$	0.71		$	0.35		$	2.09		$	0.99
Diluted	$	0.68		$	0.33		$	2.04		$	0.97

Weighted average common shares outstanding:
Basic		5,141,214			5,213,607			5,158,816			5,210,066
Diluted		5,292,142			5,268,412			5,270,138			5,272,721

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
(in thousands)
Net income	$	3,834		$	1,888		$	11,391		$	5,435
Other comprehensive income:
Change in unrealized holding gains (losses) on securities available for sale		(526	)		549			(1,427	)		2,506
Reclassification adjustment for securities gains realized in net income		—			—			—			(392	)
Other comprehensive income (loss), before tax		(526	)		549			(1,427	)		2,114
Income tax effect related to items of other comprehensive income (loss)		114			(128	)		310			(492	)
Other comprehensive income (loss), after tax		(412	)		421			(1,117	)		1,622
Comprehensive income	$	3,422		$	2,309		$	10,274		$	7,057

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


	Common Stock					Preferred Stock					Additional			Retained			Accumulated Other 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 ($0.10 per share)		—			—		—			—		—			(510	)		—			(510	)
Preferred stock dividend ($0.105 per share)		—			—		—			—		—			(30	)		—			(30	)
Balances at June 30, 2021		5,127,681			—		287,895			—		43,852			44,181			1,454			89,487

Net income		—			—		—			—		—			3,834			—			3,834
Other comprehensive income, net of tax		—			—		—			—		—			—			(412	)		(412	)
Stock compensation expense		—			—		—			—		146			—			—			146
Stock options exercised		21,000			—		—			—		294			—			—			294
Stock repurchase		—			—		(4,608	)		—		(86	)		—			—			(86	)
Common stock dividend ($0.10 per share)		—			—		—			—		—			(514	)		—			(514	)
Preferred stock dividend ($0.105 per share)		—			—		—			—		—			(30	)		—			(30	)
Balances at September 30, 2021		5,148,681		$	—		283,287		$	—	$	44,206		$	47,471		$	1,042		$	92,719

	Common Stock					Preferred Stock					Additional			Retained			Accumulated Other 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		8,580			—		—			—		213			—			—			213
Stock options exercised		—			—		—			—		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

Net income		—			—		—			—		—			1,888			—			1,888
Other comprehensive income, net of tax		—			—		—			—		—			—			421			421
Stock compensation expense		—			—		—			—		142			—			—			142
Stock options exercised		9			—		—			—		106			—			—			106
Common stock dividend ($0.08 per share)		—			—		—			—		—			(417	)		—			(417	)
Preferred stock dividend ($0.084 per share)		—			—		—			—		—			(24	)		—			(24	)
Balances at September 30, 2020		5,219,531		$	—		287,895		$	—	$	46,334		$	34,954		$	1,806		$	83,094

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)


	For the nine months ended September 30,
(in thousands)	2021			2020
Cash flows from operating activities:
Net income	$	11,391		$	5,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		754			400
Investment amortization, net		903			639
Provision for loan losses		1,045			2,537
Provision for other real estate owned		113			242
Stock-based compensation expense		454			555
Income on bank owned life insurance, net		(261	)		(313	)
Gain on sale of investment securities available for sale		—			(392	)
Gain on sale of fixed assets		(90	)		(15	)
Gain on sale of other real estate owned		(33	)		—
Net change in operating assets and liabilities:
Accrued interest receivable		(118	)		360
Other assets		(2,120	)		(310	)
Accrued interest payable		293			(58	)
Other liabilities		1,054			(22	)
Net cash provided by operating activities		13,385			9,058

Cash flows from investing activities:
Activity for investment securities available for sale:
Purchases		(38,520	)		(55,191	)
Maturities/calls and principal repayments		19,645			9,275
Sales		—			18,787
Net increase in loans		(58,436	)		(84,283	)
Redemption of BOLI policies		429			—
Proceeds from sale of fixed assets		113			89
Purchase of fixed assets		(1,511	)		(1,054	)
Proceeds from sale of other real estate owned		457			—
Purchase of other investments, at cost		—			(1,184	)
Redemption of other investments, at cost		2,776			3,666
Net cash provided used in investing activities		(75,047	)		(109,895	)

Cash flows from financing activities:
Net increase in deposits		105,257			72,735
Repurchase of common stock		(3,946	)		—
Repurchase of preferred stock		(86	)		—
Proceeds from FHLB advances		—			27,000
Repayment of FHLB advances		—			(6,000	)
Cash received upon exercise of stock options		1,139			154
Dividends paid on common stock		(1,551	)		(1,250	)
Dividends paid on preferred stock		(90	)		(73	)
Net cash provided by financing activities		100,723			92,566

Net change in cash and cash equivalents		39,061			(8,271	)

Cash and cash equivalents, beginning of period		63,025			42,779

Cash and cash equivalents, end of period	$	102,086		$	34,508

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings	$	3,562			7,076
Income taxes		4,532		$	2,387

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.

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, as amended on May 11, 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.

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 September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

			September 30, 2021
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. government agencies	$	7,467	$	14	$	(37	)	$	7,444
State and municipal obligations		19,893		868		(263	)		20,498
Mortgage-backed securities - agency		39,179		406		(336	)		39,249
Collateralized mortgage obligations - agency		47,760		691		(348	)		48,103
Asset-backed securities		2,672		—		(5	)		2,667
Corporate bonds		8,950		399		(58	)		9,291
Total	$	125,921	$	2,378	$	(1,047	)	$	127,252

	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):


	September 30, 2021
	Less Than 12 Months				More Than 12 Months				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. government agencies	$	3,447	$	37	$	—	$	—	$	3,447	$	37
State and municipal obligations		3,550		263		—		—		3,550		263
Mortgage-backed securities - agency		23,016		336		—		—		23,016		336
Collateralized mortgage obligations - agency		14,729		196		7,419		152		22,148		348
Asset-backed securities		—		—		2,667		5		2,667		5
Corporate bonds		2,142		58		—		—		2,142		58
Total	$	46,884	$	890	$	10,086	$	157	$	56,970	$	1,047

	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

Information pertaining to the number of securities with gross unrealized losses is detailed in the table below:

	September 30, 2021
	Less Than 12 Months		More Than 12 Months		Total
U.S. government agencies		2		—		2
State and municipal obligations		3		—		3
Mortgage-backed securities - agency		7		—		7
Collateralized mortgage obligations - agency		6		2		8
Asset-backed securities		—		2		2
Corporate bonds		5		—		5
		23		4		27

	December 31, 2020
	Less Than 12 Months		More Than 12 Months		Total
Mortgage-backed securities - agency		1		—		1
Collateralized mortgage obligations - agency		5		—		5
Asset-backed securities		—		2		2
Corporate bonds		4		—		4
		10		2		12

Management of the Company believes all unrealized losses as of September 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 September 30, 2020		Nine Months Ended September 30, 2020
AFS
Gross proceeds	$	—	$	18,787
Gross realized gains		—		392

There were no AFS investment security sales for the three or nine months ended September 30, 2021.

The amortized cost and estimated fair value of AFS investments in debt securities at September 30, 2021, by contractual maturity, are shown below (in thousands).

	September 30, 2021
	Amortized Cost		Fair Value
Over 5 years through 10 years	$	16,903	$	17,247
Over 10 years		19,407		19,986
Total securities other than asset-backed and mortgage-backed securities		36,310		37,233

Mortgage-backed securities		39,179		39,249
Collaterized mortgage obligations		47,760		48,103
Asset-backed securities		2,672		2,667
Total	$	125,921	$	127,252

Expected maturities may differ from contractual maturities when issuers and borrowers have the right to call or prepay the obligations.

AFS securities totaling $0.2 million were pledged against deposits and borrowings at September 30, 2021. No AFS securities were pledged at December 31, 2020.

Other investments are comprised of the following and are recorded at cost which approximates fair value (in thousands):

Schedule of Other Investment

	September 30, 2021		December 31, 2020
Federal Home Loan Bank stock	$	1,225	$	1,501
Investment in Trust Preferred Securities		247		247
Certificates of deposit		1,504		4,004
Other investments		500		500
Total other investments, at cost	$	3,476	$	6,252

Certificates of deposit totaling $1.2 million and $0.8 million were pledged against customer deposits at September 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

	September 30,			December 31,
	2021			2020
Real estate loans:
One-to-four family residential	$	129,660		$	114,119
Commercial real estate		421,857			369,706
Home equity loans and lines of credit		20,581			17,174
Residential construction		35,041			30,989
Other construction and land		73,010			68,611
Total real estate loans		680,149			600,599
Commercial		225,355			243,617
Consumer		32,358			35,362
Total commercial and consumer		257,713			278,979
Loans receivable, gross		937,862			879,578
Net deferred loan fees		(707	)		(956	)
Unaccreted discount		(247	)		(274	)
Unamortized premium		185			197
Loans receivable, net of deferred fees and costs	$	937,093		$	878,545

Commercial loans includes PPP loans with recorded investments of $6.7 million and $22.5 million as of September 30, 2021 and December 31, 2020, respectively. Net deferred fee income recognized on PPP loans in the nine months ended September 30, 2021 totaled $0.8 million and is included in loan interest income with $0.3 million remaining to be recognized in future periods.

The Bank had $51.3 million and $41.1 million of loans pledged as collateral to secure funding with the FHLB at September 30, 2021 and December 31, 2020, respectively.

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):


	Three Months Ended September 30, 2021
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction		Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,227		$	4,714		$	226		$	372	$	777		$	5,750		$	259		$	13,325
Provision		130			267			10			21		29			46			(9	)		494
Charge-offs		(1	)		(52	)		—			—		—			(100	)		—			(153	)
Recoveries		2			—			—			—		—			62			—			64
Ending balance	$	1,358		$	4,929		$	236		$	393	$	806		$	5,758		$	250		$	13,730

	Three Months Ended September 30, 2020
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction		Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,323		$	3,941		$	237		$	211	$	710		$	4,800		$	147		$	11,369
Provision		(102	)		(107	)		(5	)		142		114			741			15			798
Charge-offs		—			—			—			—		—			(412	)		(1	)		(413	)
Recoveries		1			—			—			—		—			233			—			234
Ending balance	$	1,222		$	3,834		$	232		$	353	$	824		$	5,362		$	161		$	11,988

	Nine Months Ended September 30, 2021
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction		Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,297		$	4,559		$	231		$	389	$	843		$	5,118		$	135		$	12,572
Provision		70			422			5			4		(54	)		483			115			1,045
Charge-offs		(30	)		(52	)		—			—		—			(304	)		—			(386	)
Recoveries		21			—			—			—		17			461			—			499
Ending balance	$	1,358		$	4,929		$	236		$	393	$	806		$	5,758		$	250		$	13,730

	Nine Months Ended September 30, 2020
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction		Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,098		$	3,122		$	188		$	84	$	584		$	5,024		$	187		$	10,287
Provision		121			712			44			269		240			1,174			(23	)		2,537
Charge-offs		—			—			—			—		—			(1,623	)		(27	)		(1,650	)
Recoveries		3			—			—			—		—			787			24			814
Ending balance	$	1,222		$	3,834		$	232		$	353	$	824		$	5,362		$	161		$	11,988

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):


	September 30, 2021
	One-to-four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	21	$	—	$	—	$	—	$	—			$	—	$	21
Collectively evaluated for impairment		1,337		4,929		236		393		806		5,758		250		13,709
Ending Balance	$	1,358	$	4,929	$	236	$	393	$	806	$	5,758	$	250	$	13,730

Loans Receivable
Individually evaluated for impairment	$	741	$	2,129	$	—	$	—	$	—	$	30	$	—	$	2,900
Collectively evaluated for impairment		128,695		419,058		20,624		34,899		72,714		225,794		32,409		934,193
Loans and Leases Receivable, Gross	$	129,436	$	421,187	$	20,624	$	34,899	$	72,714	$	225,824	$	32,409	$	937,093

	December 31, 2020
	One-to-four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other 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
Ending Balance	$	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.

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.

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, purchased student loans for which there is a 98% guarantee, 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):


	September 30, 2021
Loan Grade	One-to-Four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
1	$	410	$	2,246	$	115	$	—	$	—	$	1,934	$	246	$	4,951
2		—		251		—		—		—		261		—		512
3		8,840		40,501		3,490		—		10,093		13,558		46		76,528
4		104,484		309,881		15,006		31,597		51,797		98,494		30,619		641,878
5		13,276		59,626		1,677		3,302		10,824		109,943		1,406		200,054
6		1,317		6,281		258		—		—		1,287		29		9,172
7		1,109		2,401		78		—		—		347		63		3,998
Total	$	129,436	$	421,187	$	20,624	$	34,899	$	72,714	$	225,824	$	32,409	$	937,093

	December 31, 2020
Loan Grade	One-to-Four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and 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

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).


	September 30, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
One-to-four family residential	$	—	$	—	$	—	$	—	$	129,436	$	129,436
Commercial real estate		98		—		120		218		420,969		421,187
Home equity and lines of credit		—		—		—		—		20,624		20,624
Residential construction		—		—		—		—		34,899		34,899
Other construction and land		—		—		—		—		72,714		72,714
Commercial		—		—		—		—		225,824		225,824
Consumer		1,130		238		2,189		3,557		28,852		32,409
Total	$	1,228	$	238	$	2,309	$	3,775	$	933,318	$	937,093

	December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans 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

Impaired Loans

The following table presents recorded investments in loans considered to be impaired and related information on those impaired loans as of September 30, 2021 and December 31, 2020 (in thousands).

Schedule of Impaired Loans

	September 30, 2021						December 31, 2020
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a valuation allowance
One-to-four family residential	$	389	$	390	$	—	$	281	$	352	$	—
Commercial real estate		2,129		2,181		—		987		994		—
Other construction and land		—		—		—		126		152		—
Commercial		30		30		—		308		434		—
Consumer		—		—		—		66		68		—
		2,548		2,601		—		1,768		2,000		—

Loans with a valuation allowance
One-to-four family residential		352		351		21		—		—		—
Commercial		—		—		—		12		12		1
		352		351		21		12		12		1

Total
One-to-four family residential		741		741		21		281		352		—
Commercial real estate		2,129		2,181		—		987		994		—
Other construction and land		—		—		—		126		152		—
Commercial		30		30		—		320		446		1
Consumer		—		—		—		66		68		—
	$	2,900	$	2,952	$	21	$	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 September 30,
	2021				2020
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a valuation allowance
One-to-four family residential	$	391	$	3	$	356	$	10
Commercial real estate		2,202		19		2,403		70
Other construction and land		—		—		281		10
Commercial		33		—		266		5
Consumer		—		—		77		2
		2,626		22		3,383		97

Loans with a valuation allowance
One-to-four family residential		352		3		—		—
Commercial real estate		—		—		—		—
Other construction and land		—		—		—		—
Commercial		—		—		260		—
Consumer		—		—		16		—
		352		3		276		—

Total
One-to-four family residential		743		6		356		10
Commercial real estate		2,202		19		2,403		70
Other construction and land		—		—		281		10
Commercial		33		—		526		5
Consumer		—		—		93		2
	$	2,978	$	25	$	3,659	$	97

	Nine Months Ended September 30,
	2021				2020
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a valuation allowance
One-to-four family residential	$	394	$	9	$	359	$	15
Commercial real estate		2,243		59		2,429		94
Other construction and land		35		—		283		10
Commercial		—		—		392		7
Consumer		—		—		83		3
		2,672		68		3,546		129

Loans with a valuation allowance
One-to-four family residential		355		9		—		—
Commercial real estate		—		—		—		—
Other construction and land		—		—		—		—
Commercial		—		—		311		—
Consumer		—		—		16		1
		355		9		327		1

Total
One-to-four family residential		749		18		359		15
Commercial real estate		2,243		59		2,429		94
Other construction and land		35		—		283		10
Commercial		—		—		703		7
Consumer		—		—		99		4
	$	3,027	$	77	$	3,873	$	130

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

	September 30, 2021		December 31, 2020
One-to-four family residential	$	129	$	39
Commercial real estate		790		31
Other construction and land		—		126
Commercial		230		324
Consumer		4		13
Non-performing loans	$	1,153	$	533

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


	September 30, 2021
	Performing		Nonperforming		Total
	TDRs		TDRs		TDRs
One-to-four family residential	$	582	$	21	$	603
Commercial real estate		888		—		888
Other construction and land		—		—		—
Commercial		301		118		419
Consumer		43		4		47
	$	1,814	$	143	$	1,957

	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):

	Modification Type	Number of TDR Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Three months ended September 30, 2021
	Extended payment terms	3	$	302	$	302

There were no loan modifications deemed TDRs for the three months ended September 30, 2020.

	Modification Type	Number of TDR Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Nine months ended September 30, 2021
	Interest rate concession	1	$	357	$	357
	Extended payment terms	3		302		302
Total		4	$	659	$	659

Nine months ended September 30, 2020
	Extended payment terms	3	$	173	$	172

There were no TDRs that defaulted during the three or nine month period ending September 30, 2021 or 2020 and which were modified as TDRs within the previous 12 months.

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
	Nine Months Ended September 30,								December 31,
	2021				2020				2020
	Balance		Interest Expense		Balance		Interest Expense		Balance		Interest Expense
Noninterest-bearing demand	$	268,858	$	—	$	189,776	$	—	$	203,502	$	—
Interest-bearing demand		67,027		130		49,147		44		63,614		75
Money Market		478,897		1,401		322,203		1,442		384,838		1,915
Savings		14,927		9		18,904		26		10,584		8
Time Deposits		222,028		1,012		305,206		4,713		283,942		5,416
	$	1,051,737	$	2,552	$	885,236	$	6,225	$	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 September 30, 2021, commitments to extend credit and standby letters of credit totaled $300.0 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						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Numerator:
Net income	$	3,834		$	1,888		$	11,391		$	5,435
Less: Preferred stock dividends		(30	)		(25	)		(90	)		(73	)
Net income applicable to common equity		3,804			1,863			11,301			5,362
Undistributed earnings allocated to participating securities		(182	)		(79	)		(539	)		(225	)
Net income applicable to common stockholders	$	3,622		$	1,784		$	10,762		$	5,137

Denominator:
Basic - Total weighted-average basic shares outstandings		5,141,214			5,213,607			5,158,816			5,210,066
Stock options		150,928			54,805			111,322			62,655
Diluted - Total weighted-average diluted shares outstanding		5,292,142			5,268,412			5,270,138			5,272,721

Basic income per share	$	0.71		$	0.35		$	2.09		$	0.99
Diluted income per share	$	0.68		$	0.33		$	2.04		$	0.97

The Company excluded 107,500 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $24.21 from the computation of diluted earnings per share for the three and nine months ended September 30, 2021 because of their antidilutive effect.

The Company excluded 559,000 potentially dilutive shares of common stock issuable upon exercise of stock options with weighted average exercise prices of $15.93 from the computation of diluted earnings per share for the three and nine months ended September 30, 2020 because of their antidilutive effect.

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).


	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
	AFS Securities			Total			AFS Securities			Total
Balance, beginning of period	$	1,454		$	1,454		$	2,159		$	2,159
Change in net unrealized holding gains on AFS securities		(526	)		(526	)		(1,427	)		(1,427	)
Income tax effect		114			114			310			310
Balance, end of period	$	1,042		$	1,042		$	1,042		$	1,042

	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
	AFS Securities			Total			AFS Securities			Total
Balance, beginning of period	$	1,385		$	1,385		$	184		$	184
Change in net unrealized holding losses on AFS securities		549			549			2,506			2,506
Reclassification adjustment for securities gains realized in net income		—			—			(392	)		(392	)
Income tax effect		(128	)		(128	)		(492	)		(492	)
Balance, end of period	$	1,806		$	1,806		$	1,806		$	1,806

There were no AFS securities sold during the three or nine months ended September 30, 2021.

NOTE 9. REPORTABLE SEGMENTS

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 September 30, 2021								As of and for the Three Months Ended September 30, 2020
	Core Bank		Carbucks		Other		Total		Core Bank		Carbucks		Other		Total
Interest income	$	8,795	$	4,754	$	461	$	14,010	$	7,841	$	3,574	$	363	$	11,778
Interest expense		418		374		431		1,223		1,284		265		219		1,768
Net interest income		8,377		4,380		30		12,787		6,557		3,309		144		10,010
Provision for loan losses		386		108		—		494		125		673		—		798
Noninterest income		443		38		177		658		423		31		108		562
Noninterest expense		5,409		2,487		11		7,907		4,966		2,240		15		7,221
Net income before taxes		3,025		1,823		196		5,044		1,889		427		237		2,553
Income tax expense		726		436		48		1,210		492		123		50		665
Net income	$	2,299	$	1,387	$	148	$	3,834	$	1,397	$	304	$	187	$	1,888
												.
Total loans, net of deferred fees and costs	$	845,962	$	91,131	$	—	$	937,093	$	769,324	$	70,237	$	—	$	839,561
Total assets	$	970,034	$	90,434	$	142,199	$	1,202,667	$	825,180	$	69,730	$	117,888	$	1,012,798


	As of and for the Nine Months Ended September 30, 2021									As of and for the Nine Months Ended September 30, 2020
	Core Bank		Carbucks		Other			Total		Core Bank		Carbucks		Other		Total
Interest income	$	25,823	$	13,879	$	1,228		$	40,930	$	23,740	$	12,298	$	1,082	$	37,120
Interest expense		1,580		1,079		1,296			3,955		5,028		1,323		703		7,054
Net interest income		24,243		12,800		(68	)		36,975		18,712		10,975		379		30,066
Provision for loan losses		977		68		—			1,045		1,727		810		—		2,537
Noninterest income		1,561		112		328			2,001		1,132		95		733		1,960
Noninterest expense		15,568		7,362		47			22,977		15,026		7,178		46		22,250
Net income before taxes		9,259		5,482		213			14,954		3,091		3,082		1,066		7,239
Income tax expense		2,206		1,306		51			3,563		771		769		264		1,804
Net income	$	7,053	$	4,176	$	162		$	11,391	$	2,320	$	2,313	$	802	$	5,435
													.
Total loans, net of deferred fees and costs	$	845,962	$	91,131	$	—		$	937,093	$	769,324	$	70,237	$	—	$	839,561
Total assets	$	970,034	$	90,434	$	142,199		$	1,202,667	$	825,180	$	69,730	$	117,888	$	1,012,798

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.

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):


	September 30, 2021
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	7,444	$	—	$	7,444
State and municipal obligations		—		20,498		—		20,498
Mortgage-backed securities - agency		—		39,249		—		39,249
Collateralized mortgage obligations - agency		—		48,103		—		48,103
Asset-backed securities		—		2,667		—		2,667
Corporate bonds		—		—		9,291		9,291
Total recurring assets at fair value	$	—	$	117,961	$	9,291	$	127,252

	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 September 30, 2021, or December 31, 2020.

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):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance at beginning of period	$	7,604	$	500	$	4,605	$	500
Corporate bond additions		1,500		2,000		4,450		2,000
Corporate bond fair value adjustments		187		—		236		—

Balance at end of period	$	9,291	$	2,500	$	9,291	$	2,500

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.

Other Real Estate Owned

Other real estate owned, or 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.

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):


	September 30, 2021
	Level 1		Level 2		Level 3		Total
Real estate owned:
Other construction and land	$	—	$	—	$	1,395	$	1,395
Total	$	—	$	—	$	1,395	$	1,395

	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 September 30, 2021, or December 31, 2020.

Impaired loans totaling $2.1 million at September 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 September 30, 2021 and December 31, 2020.

September 30, 2021

December 31, 2020

Valuation Technique

Unobservable Input

General Range

Impaired loans

Discounted Appraisals

Collateral discounts

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% -3.5%

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):


	Carrying		Fair Value Measurements at September 30, 2021
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	102,086	$	102,086	$	102,086	$	—	$	—
Securities available for sale		127,252		127,252		—		117,961		9,291
Loans receivable, net of deferred fees and costs		937,093		928,372		—		—		928,372
Other investments, at cost		3,476		3,476		—		3,476		—
Accrued interest receivable		5,822		5,822		—		5,822		—
BOLI		14,694		14,694		—		14,694		—

Liabilities:
Demand deposits, money market and savings	$	829,709	$	829,709	$	—	$	829,709	$	—
Time deposits		222,028		222,117		—		222,117
Federal Home Loan Bank advances		16,000		16,140		—		16,140		—
Junior subordinated debentures		35,834		35,805		—		35,805		—
Accrued interest payable		629		629		—		629		—

	Carrying		Fair Value Measurements at December 31, 2020
	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	$	662,538	$	—	$	662,538	$	—
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 September 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 September 30, 2021. Repurchased shares will become treasury shares and may be utilized for general corporate purposes.

On August 18, 2021, the Company’s Board of Directors approved a preferred stock repurchase plan to repurchase up to 75,000 shares of Series A preferred stock at a price acceptable to the Company through December 31, 2021.

The following table summarizes repurchase activity for the nine months ended September 30, 2021.

Schedule of Share Repurchase

Period	Total Number of Common Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of the Publicly Announced Program		Maximum Number of Shares that May Yet Be Purchased Under the Program
January 1, 2021 - March 31, 2021		135,230	$	17.65		135,230		114,770
April 1, 2021- June 30, 2021		75,216		20.62		210,446		39,554
July 1, 2021 - July 31, 2021		—		—		210,446		39,554
August 1, 2021 - August 31, 2021		—		—		210,446		39,554
September 1, 2021 - September 30, 2021		—		—		210,446		39,554

Period	Total Number of Preferred Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of the Publicly Announced Program		Maximum Number of Shares that May Yet Be Purchased Under the Program
July 1, 2021 - July 31, 2021		n/a		n/a		n/a		n/a
August 1, 2021- August 31, 2021		4,608	$	18.67		4,608		70,392
September 1, 2021 - September 30, 2021		—		—		4,608		70,392

NOTE 12. SUBSEQUENT EVENTS

Management has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 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 October 18, 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 November 19, 2021 to shareholders of record on November 5, 2021.

On October 20, 2021, the Company’s Board of Directors approved the definitive settlement of litigation related to the Bank’s former factoring division. The settlement agreement, signed by all parties on November 4, 2021, awards the Company $1.25 million as reimbursement for legal fees.

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,” “continue,” “seek,” “could,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company is under no duty to and does not undertake any obligation to update any forward-looking statements after the date of this Form 10-Q except as required by law.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

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 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;

Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;

Adverse changes in asset quality and resulting credit risk-related losses and expenses;

Changes in accounting policies, practices or guidelines;

Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed; and

The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, (including the potential continuing negative effects of COVID-19 on trade) supply chains disruptions in transportation, war or terrorist activities, essential utility outages or trade disputes and tariffs.

For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Form 10 as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021, as amended on May 11, 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.

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 September 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

GrandSouth Bancorporation (“we,” “us,” “our,” or 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 GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to a Plan of Exchange approved by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company, and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other than that of owning the Bank and has no employees.

The Company has one non-bank subsidiary, GrandSouth Capital Trust I (the “Trust”), a 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 $112.9 million to $1.2 billion at September 30, 2021, or 10.4%, from December 31, 2020. This increase in assets was primarily due to increases in cash and cash equivalents of $39.1 million, investments available for sale (“AFS”) of $16.5 million, and loans of $58.5 million.

Total liabilities increased $106.7 million to $1.1 billion at September 30, 2021, or 10.6%, from December 31, 2020, due primarily to increases in total deposits of $105.3 million, which includes increases in noninterest-bearing deposits of $65.4 million.

Total shareholders’ equity increased $6.2 million to $92.7 million, or 7.2%, 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 repurchases of common and preferred shares. Tangible book value per common share, a non-GAAP measure, increased $1.60 to $17.63 at September 30, 2021 from $16.03 at December 31, 2020.

The following is a reconciliation of book value per common share to tangible book value per common share for the periods indicated:

	As of
(in thousands, except share data)	September 30, 2021			December 31, 2020
Book Value (GAAP)	$	92,719		$	86,525
Book Value Attributable to Preferred Shares		(1,212	)		(1,298	)
Book Value Attributable to Common Shares		91,507			85,227
Goodwill and intangibles		(737	)		(737	)
Book Value Attributable to Common Shares (Tangible)	$	90,770		$	84,490
Outstanding common shares		5,148,681			5,271,971
Tangible Book Value Per Common Share	$	17.63		$	16.03

Cash and Cash Equivalents

Total cash and cash equivalents increased $39.1 million to $102.1 million at September 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 continue to 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).

	September 30, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agencies	$	7,467	$	7,444	$	—	$	—
State and municipal obligations		19,893		20,498		16,684		17,820
Mortgage-backed securities - agency		39,179		39,249		31,056		31,487
Collateralized mortgage obligations - agency		47,760		48,103		49,441		50,560
Asset-backed securities		2,672		2,667		6,268		6,235
Corporate bonds		8,950		9,291		4,500		4,605
	$	125,921	$	127,252	$	107,949	$	110,707

AFS investment securities increased $16.5 million, or 14.9%, to $127.3 million at September 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.

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.

	September 30,						December 31,
	2021						2020
	Amount			Percent			Amount			Percent
Real estate loans:
One-to-four family residential	$	129,660			13.8	%	$	114,119			13.0	%
Commercial		421,857			45.0			369,706			42.0
Home equity loans and lines of credit		20,581			2.2			17,174			2.0
Residential construction		35,041			3.7			30,989			3.5
Other construction and land		73,010			7.8			68,611			7.8
Commercial		225,355			24.0			243,617			27.7
Consumer		32,358			3.5			35,362			4.0
Loans receivable, gross	$	937,862			100.0	%	$	879,578			100.0	%
Deferred loan fees, net		(707	)					(956	)
Unaccreted discount		(247	)					(274	)
Unamortized premium		185						197

Loans receivable, net of deferred fees and costs	$	937,093					$	878,545

Included in commercial loans are PPP loans totaling $6.7 million and $22.5 million as of September 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 nine 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 that are still accruing interest as of September 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
September 30, 2021
Commercial real estate	$	98		$	—		$	120		$	218
Consumer		1,130			238			2,189			3,557
Total delinquent loans	$	1,228		$	238		$	2,309		$	3,775
% of total loans, net		0.13	%		0.02	%		0.25	%		0.40	%

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 0.40% at September 30, 2021. Delinquent loans decreased $1.3 million, or 26.5%, to $3.8 million at September 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).

	September 30,			December 31,
	2021			2020
Nonaccrual loans:
Real estate loans:
One-to-four family residential	$	129		$	39
Commercial		790			31
Other construction and land		—			126
Commercial		230			324
Consumer		4			13
Total nonperforming loans		1,153			533

REO:
Commercial real estate		—			513
Other construction and land		1,395			1,419
Total foreclosed real estate		1,395			1,932
Total nonperforming assets	$	2,548		$	2,465

TDRs still accruing	$	1,814		$	1,254

Ratios:
Nonperforming loans to total loans		0.12	%		0.06	%
Nonperforming assets to total assets		0.21	%		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.

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).

	September 30,			December 31,
	2021			2020
Classified loans:
Substandard	$	3,998		$	3,701
Doubtful		—			—
Loss		—			—
Total classified loans:		3,998			3,701
Special mention		9,172			7,777
Total criticized loans	$	13,170		$	11,478

Total classified loans as a % of total loans, net of deferred fees and costs		0.43	%		0.42	%
Total criticized loans as a % of total loans, net of deferred fees and costs		1.41	%		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 $8.2 million of loans to the restaurant and food service industry and $4.9 million of loans to the hotel industry as of September 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.

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 eight loan categories, contain average net loss rates ranging from approximately 0.00% to 0.72%.

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 considers 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 during 2021 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.

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
	Nine Months Ended September 30,
	2021			2020
Balance at beginning of period	$	12,572		$	10,287
Charge-offs:
Real Estate:
One-to-four family residential		30			—
Commercial		52			—
Home equity loans and lines of credit		—			—
Residential construction		—			—
Other construction and land		—			—
Commercial		304			1,623
Consumer		—			27
Total charge-offs		386			1,650

Recoveries:
Real Estate:
One-to-four family residential		21			3
Commercial		—			—
Home equity loans and lines of credit		—			—
Residential construction		—			—
Other construction and land		17			—
Commercial		461			787
Consumer		—			24
Total recoveries		499			814
Net (recoveries) chargeoffs		(113	)		836
Provision for loan losses		1,045			2,537
Balance at end of period	$	13,730		$	11,988

Ratios:
Net (recoveries) charge-offs to average loans outstanding		(0.01	)%		0.11	%
Allowance to nonperforming loans at period end		1,190.81	%		2,011.41	%
Allowance to total loans at period end		1.47	%		1.43	%

Our allowance as a percentage of total loans increased to 1.47% at September 30, 2021 from 1.43% at both December 31, 2020, and September 30, 2020, primarily as the result of loan growth in our more heavily reserved Carbucks segment.

We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. However, in light of the COVID-19 pandemic, there is a risk that loss rates could increase. Our coverage ratio of nonperforming loans decreased to 1,190.81% at September 30, 2021 from 2,358.72% at December 31, 2020, and 2,011.41% at September 30, 2020, primarily as the result of the increased 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, 2021				December 31, 2020
	Balance		Percent		Balance		Percent
Deposit type:
Savings accounts	$	14,927		1.4	$	10,584		1.1
Time deposits		222,028		21.1		283,942		30.1
Money market accounts		478,897		45.5		384,838		40.7
Interest-bearing demand accounts		67,027		6.4		63,614		6.7
Noninterest-bearing demand accounts		268,858		25.6		203,502		21.5
Total deposits	$	1,051,737		100.0	$	946,480		100.0

As indicated in the above table, deposit balances increased approximately $105.3 million, or 11.1%, for the nine months ended September 30, 2021 compared to December 31, 2020. The increase in total deposits was mainly attributable to the $94.1 million, or 24.4%, increase in money market accounts and $65.4 million, or 32.1%, increase in noninterest-bearing demand accounts, partially offset by a $61.9 million, or 21.8%, decline in time deposits.

Discussion of Results of Operation

Comparison of the Three Months Ended September 30, 2021 and September 30, 2020.

General

Net income for the three months ended September 30, 2021 was $3.8 million, compared to $1.9 million for the same period in 2020. The increase in net income for the period was primarily the result of increases in net interest income and noninterest income of $2.8 million and $0.1 million, respectively, and a decrease in the provision for loan losses of $0.3 million, partially offset by an increase in noninterest expenses totaling $0.7 million.

Net Interest Income

Net interest income increased $2.8 million, or 27.7%, to $12.8 million for the three months ended September 30, 2021, compared to $10.0 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.

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 September 30,
	2021								2020
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, Core Bank⁽¹⁾	$	835,818		$	8,748		4.15	%	$	748,508		$	7,782		4.14	%
Loans, Carbucks⁽²⁾		92,110			4,754		20.48	%		60,682			3,574		23.37	%
Investments - taxable		117,879			389		1.32	%		90,522			293		1.29	%
Investments - tax exempt ⁽³⁾		12,738			88		2.76	%		12,650			89		2.81	%
Federal funds sold and other interest earning deposits		81,085			27		0.13	%		35,992			14		0.15	%
Other investments, at cost		4,147			23		2.22	%		7,927			45		2.24	%

Total interest-earning assets		1,143,777			14,029		4.87	%		956,281			11,797		4.91	%

Noninterest-earning assets		36,627								33,331

Total assets	$	1,180,404							$	989,612

Interest-bearing liabilities:
Savings accounts	$	13,437		$	3		0.10	%	$	8,603		$	2		0.10	%
Time deposits		234,642			221		0.37	%		317,511			1,076		1.35	%
Money market accounts		453,974			487		0.43	%		310,602			410		0.52	%
Interest bearing transaction accounts		68,525			45		0.26	%		38,404			23		0.24	%
Total interest bearing deposits		770,578			756		0.39	%		675,120			1,511		0.89	%

FHLB advances		16,000			36		0.89	%		17,003			39		0.92	%
Junior subordinated debentures		35,816			431		4.78	%		18,113			218		4.78	%
Other borrowings		—			—		—			—			—		—

Total interest-bearing liabilities		822,394			1,223		0.59	%		710,236			1,768		0.99	%

Noninterest-bearing deposits		260,396								193,050

Other non interest bearing liabilities		5,537								3,917

Total liabilities		1,088,327								907,203
Total equity		92,077								82,409

Total liabilities and equity	$	1,180,404							$	989,612

Tax-equivalent net interest income				$	12,806							$	10,029

Net interest-earning assets ⁽⁴⁾	$	321,383							$	246,045

Average interest-earning assets to interest-bearing liabilities		139.08	%							134.64	%

Tax-equivalent net interest rate spread ⁽⁵⁾							4.28	%							3.92	%
Tax-equivalent net interest margin ⁽⁶⁾							4.44	%							4.17	%

⁽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 for both of the three months ended September 30, 2021 and 2020.

⁽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.

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 September 30, 2021
	Compared to the Three Months Ended September 30, 2020
	Increase (decrease) due to:
(in thousands)	Volume			Rate			Total
Interest-earning assets:
Loans, Core Bank⁽¹⁾	$	935		$	31		$	966
Loans, Carbucks⁽¹⁾		1,666			(486	)		1,180
Investments - taxable		90			6			96
Investments - tax exempt ⁽²⁾		1			(2	)		(1	)
Federal funds sold and other interest earning deposits		15			(2	)		13
Other investments, at cost		(22	)		—			(22	)
Total interest-earning assets		2,685			(453	)		2,232

Interest-bearing liabilities:
Savings accounts		1			—			1
Time deposits		(227	)		(628	)		(855	)
Money market accounts		165			(88	)		77
Interest bearing transaction accounts		20			2			22
FHLB advances		(3	)		—			(3	)
Junior subordinated debentures		213			—			213
Total interest-bearing liabilities		169			(714	)		(545	)
Change in tax-equivalent net interest income	$	2,516		$	261		$	2,777

⁽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 $12.8 million for the three months ended September 30, 2021, compared to $10.0 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 $2.5 million related to volume was primarily the result of higher average loan (both Core Bank and Carbucks) and taxable investment balances which increased $118.7 million and $27.4 million, respectively, and an $82.9 million decrease in average time deposits for the three months ended September 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 $30.1 million in interest bearing transaction accounts.

The increase in tax-equivalent net interest income of $0.3 million related to rate was primarily the result of decreased costs on time deposits, partially offset by decreased yields on Carbucks loans.

Our tax-equivalent net interest margin was 4.44% for the three months ended September 30, 2021, compared to 4.17% for the same period in 2020, an increase of 27 basis points. The increase in net interest margin was primarily attributable to higher average loan and taxable investment balances combined with interest rate reductions on our cost of funds partially offset by reduced yields on our Carbucks loans.

Provision for Loan Losses

We recorded a provision for loan losses for the three months ended September 30, 2021 of $0.5 million due to organic loan growth, compared to a $0.8 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.

Noninterest Income

The following table summarizes the components of noninterest income and the corresponding changes between the three months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,
	2021		2020		Change
Service charges on deposit accounts	$	320	$	263	$	57
BOLI		84		109		(25	)
Net gain on sale of premises and equipment		6		7		(1	)
Other		248		183		65
Total noninterest income	$	658	$	562	$	96

Our noninterest income increased $0.1 million to $0.7 million in the three months ended September 30, 2021, compared to the same period in 2020 due primarily to increases in service charges on deposit accounts of $0.1 million and other noninterest of $0.1 million, partially offset by reduced income realized on BOLI policies.

Noninterest Expense

The following table summarizes the components of noninterest expense and the corresponding change between the three months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,
	2021		2020		Change
Compensation and employee benefits	$	5,367	$	4,940	$	427
Net occupancy		584		570		14
Federal deposit insurance		157		129		28
Professional and advisory		314		317		(3	)
Data processing		509		534		(25	)
Marketing and advertising		49		29		20
Net cost of operation of REO		11		20		(9	)
Other		916		682		234
Total noninterest expenses	$	7,907	$	7,221	$	686

Our noninterest expense increased $0.7 million to $7.9 million in the three months ended September 30, 2021, compared to the same period in 2020 primarily as the result of increases in compensation and employee benefits of and other noninterest expense of $0.4 million and $0.2 million, respectively. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined with annual raises and increases in employee benefits, incentives and commissions. The increase in other noninterest expense includes miscellaneous loan fees related to Carbucks.

Income Taxes

Income tax expense totaled $1.2 million for the three months ended September 30, 2021, compared to $0.7 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 24.0% and 26.0% for the three months ended September 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.

Comparison of the Nine Months Ended September 30, 2021 and September 30, 2020.

General

Net income for the nine months ended September 30, 2021 was $11.4 million, compared to $5.4 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 $6.9 million and a decrease in the provision for loan losses of $1.5 million, offset by increases in noninterest expenses $0.7 million and in income tax expense of $1.8 million.

Net Interest Income

Net interest income increased $6.9 million, or 23.0%, to $37.0 million for the nine months ended September 30, 2021, compared to $30.1 million for the same period in 2020. The increase in net interest income was primarily due to a $116.0 million increase in average loans (both Core Bank and Carbucks), a $42.7 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 loans (both Core Bank and Carbucks) and taxable investments during the period and a $106.9 million increase in our average interest-bearing liabilities.

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 Nine Months Ended September 30,
	2021								2020
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, Core Bank⁽¹⁾	$	820,177		$	25,670		4.18	%	$	721,065		$	23,469		4.35	%
Loans, Carbucks⁽²⁾		87,504			13,879		21.21	%		70,654			12,297		23.19	%
Investments - taxable		112,538			1,015		1.20	%		75,144			947		1.68	%
Investments - tax exempt ⁽³⁾		12,708			265		2.78	%		7,383			165		2.97	%
Federal funds sold and other interest earning deposits		71,678			69		0.13	%		35,669			102		0.38	%
Other investments, at cost		5,118			88		2.30	%		9,067			175		2.58	%

Total interest-earning assets		1,109,723			40,986		4.94	%		918,982			37,155		5.40	%

Noninterest-earning assets		37,046								36,529

Total assets	$	1,146,769							$	955,511

Interest-bearing liabilities:
Savings accounts	$	12,301		$	9		0.10	%	$	7,788		$	6		0.10	%
Time deposits		252,665			1,012		0.54	%		346,055			4,714		1.82	%
Money market accounts		427,296			1,401		0.44	%		287,254			1,462		0.68	%
Interest bearing transaction accounts		66,654			130		0.26	%		28,853			44		0.20	%
Total interest bearing deposits		758,916			2,552		0.45	%		669,950			6,226		1.24	%

FHLB advances		16,000			107		0.89	%		15,500			120		1.03	%
Junior subordinated debentures		35,787			1,296		4.84	%		18,103			703		5.19	%
Other borrowings		135			—		—			432			5		1.55	%

Total interest-bearing liabilities		810,838			3,955		0.65	%		703,985			7,054		1.34	%

Noninterest-bearing deposits		241,491								166,410

Other non interest bearing liabilities		5,605								4,534

Total liabilities		1,057,934								874,929
Total equity		88,835								80,582

Total liabilities and equity	$	1,146,769							$	955,511

Tax-equivalent net interest income				$	37,031							$	30,101

Net interest-earning assets ⁽⁴⁾	$	298,885							$	214,997

Average interest-earning assets to interest-bearing liabilities		136.86	%							130.54	%

Tax-equivalent net interest rate spread ⁽⁵⁾							4.29	%							4.06	%
Tax-equivalent net interest margin ⁽⁶⁾							4.46	%							4.38	%

⁽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 $56,000 and $35,000 for the nine months ended September 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.

	For the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
	Increase (decrease) due to:
(In thousands)	Volume			Rate			Total
Interest-earning assets:
Loans, Core Bank ⁽¹⁾	$	3,111		$	(910	)	$	2,201
Loans, Carbucks ⁽¹⁾		2,729			(1,147	)		1,582
Investments - taxable		390			(322	)		68
Investments - tax exempt ⁽²⁾		111			(11	)		100
Interest-earning deposits		62			(95	)		(33	)
Other investments, at cost		(70	)		(17	)		(87	)
Total interest-earning assets		6,333			(2,502	)		3,831

Interest-bearing liabilities:
Savings accounts		3			—			3
Time deposits		(1,024	)		(2,678	)		(3,702	)
Money market accounts		565			(626	)		(61	)
Interest bearing transaction accounts		71			15			86
FHLB advances		4			(17	)		(13	)
Junior subordinated debentures		643			(50	)		593
Other borrowings		(1	)		(4	)		(5	)
Total interest-bearing liabilities		261			(3,360	)		(3,099	)
Change in tax-equivalent net interest income	$	6,072			858			6,930

⁽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 $37.0 million for the nine months ended September 30, 2021, compared to $30.1 million for the same period in 2020. As indicated in the table above, the increase of $6.1 million in net interest income earned attributable to an improvement in volume was combined with a $0.9 million favorable movement in rates.

The increase in tax-equivalent net interest income of $6.1 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 $116.0 million and $42.7 million, respectively, and lower time deposits which decreased $93.4 million for the nine months ended September 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 $140.0 million and $17.7 million in money market and junior subordinated debentures balances, respectively.

The increase in tax-equivalent net interest income of $0.9 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 loans (both Core Bank and Carbucks), taxable investments, and interest-earning deposits.

Our tax-equivalent net interest margin was 4.46% for the nine months ended September 30, 2021, compared to 4.38% for the same period in 2020. The increase 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 nine months ended September 30, 2021 of $1.0 million due to organic loan growth, compared to $2.5 million 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.

Noninterest Income

The following table summarizes the components of noninterest income and the corresponding changes between the nine months ended September 30, 2021 and 2020 (in thousands):

	Nine Months Ended September 30,
	2021		2020		Change
Service charges on deposit accounts	$	910	$	719	$	191
Gain on sale of AFS investments		—		392		(392	)
BOLI		261		313		(52	)
Net gain on sale of premises and equipment		90		15		75
Other		740		521		219
Total noninterest income	$	2,001	$	1,960	$	41

Our noninterest income increased $41 thousand to $2.0 million in the nine months ended September 30, 2021, compared to the same period in 2020 due primarily to increases in service charges on deposit accounts, third-party loan referral fees and excess death benefits in 2021, offset by the gain on sale of AFS securities of $0.4 million in 2020.

Noninterest Expense

The following table summarizes the components of noninterest expense and the corresponding change between the nine months ended September 30, 2021 and 2020 (in thousands):

	Nine Months Ended September 30,
	2021		2020		Change
Compensation and employee benefits	$	15,428	$	15,140	$	288
Net occupancy		1,732		1,655		77
Federal deposit insurance		482		360		122
Professional and advisory		888		951		(63	)
Data processing		1,536		1,378		158
Marketing and advertising		128		115		13
Net cost of operation of REO		140		293		(153	)
Other		2,643		2,358		285
Total noninterest expenses	$	22,977	$	22,250	$	727

Our noninterest expense increased $0.7 million to $23.0 million in the nine months ended September 30, 2021, compared to the same period in 2020. Compensation and employee benefits increased $0.3 million for the nine months ended September 30, 2021, as compared to the same period in 2020. The increase is primarily related to increased full-time equivalent employees combined with annual raises and increases in employee benefits, incentives and commissions.

Federal deposit insurance increased $0.1 million for the nine months ended September 30, 2021, compared to the same period in 2020 due to increased deposit balances.

Data processing expenses increased $0.2 million for the nine months ended September 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 $0.2 million for the nine months ended September 30, 2021, compared to the same period in 2020, primarily due to valuation adjustments for updated appraisals or sales contract amounts in 2020.

Other noninterest expense increased $0.3 million for the nine months ended September 30, 2021, compared to the same period in 2020 primarily due to increased software maintenance and licensing expenses.

Income Taxes

Income tax expense totaled $3.6 million for the nine months ended September 30, 2021, compared to $1.8 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 23.8% and 24.9% for the nine months ended September 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.

Discussion of Segment Results

See Note 9, “Reportable Segments” in notes to the consolidated financial statements included under Item 1 -“Financial Statements” for additional disclosures related to our reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the “Noninterest income” and “Noninterest expense” sections above.

Comparison of the Three Months Ended September 30, 2021 and 2020.

	As of and for the Three Months Ended September 30, 2021								As of and for the Three Months Ended September 30, 2020
	Core Bank		Carbucks		Other		Total		Core Bank		Carbucks		Other		Total
Interest income	$	8,795	$	4,754	$	461	$	14,010	$	7,841	$	3,574	$	363	$	11,778
Interest expense		418		374		431		1,223		1,284		265		219		1,768
Net interest income		8,377		4,380		30		12,787		6,557		3,309		144		10,010
Provision for loan losses		386		108		—		494		125		673		—		798
Noninterest income		443		38		177		658		423		31		108		562
Noninterest expense		5,409		2,487		11		7,907		4,966		2,240		15		7,221
Net income before taxes		3,025		1,823		196		5,044		1,889		427		237		2,553
Income tax expense		726		436		48		1,210		492		123		50		665
Net income	$	2,299	$	1,387	$	148	$	3,834	$	1,397	$	304	$	187	$	1,888

Total loans, net of deferred fees and costs	$	845,962	$	91,131	$	—	$	937,093	$	769,324	$	70,237	$	—	$	839,561
Total assets	$	970,034	$	90,434	$	142,199	$	1,202,667	$	825,180	$	69,730	$	117,888	$	1,012,798

Core Bank

Core Bank consists of commercial and consumer lending and full-service branches in its geographic region with its own management team. The branches provide a full range of traditional banking products as well as treasury services and merchant services.

Core Bank net income increased $0.9 million to $2.3 million for the three months ended September 30, 2021 compared to $1.4 million for the same period in 2020. Net interest income increased $1.8 million to $8.4 million for the three months ended September 30, 2021 from $6.6 million for the same period a year ago primarily due to increased loan volume and reduced funding costs. Provision for loan losses increased $0.3 million for the three months ended September 30, 2021 compared to 2020 due to organic growth. Noninterest expense increased $0.4 million to $5.4 million for the 2021 period compared to $5.0 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 12,000 floored used vehicles with an average price of $7,000 per unit, generally has an average 66-day turnover, and generates approximately $200 in financing fees per vehicle which is included in loan interest income.

Carbucks net income increased $1.1 million to $1.4 million for the three months ended September 30, 2021 compared to $0.3 million for the same three-month period in 2020. Net interest income increased $1.1 million to $4.4 million for the 2021 period from $3.3 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased $0.6 million for the three months ended September 30, 2021 compared to 2020 due to additional qualitative adjustments in 2020 related to COVID-19 uncertainty. Noninterest expense increased $0.3 million to $2.5 million for the 2021 period compared to $2.2 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 $39 thousand to $0.1 million for the three months ended September 30, 2021 compared to 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.

Comparison of the Nine Months Ended September 30, 2021 and 2020.

	As of and for the Nine Months Ended September 30, 2021									As of and for the Nine Months Ended September 30, 2020
	Core Bank		Carbucks		Other			Total		Core Bank		Carbucks		Other		Total
Interest income	$	25,823	$	13,879	$	1,228		$	40,930	$	23,740	$	12,298	$	1,082	$	37,120
Interest expense		1,580		1,079		1,296			3,955		5,028		1,323		703		7,054
Net interest income		24,243		12,800		(68	)		36,975		18,712		10,975		379		30,066
Provision for loan losses		977		68		—			1,045		1,727		810		—		2,537
Noninterest income		1,561		112		328			2,001		1,132		95		733		1,960
Noninterest expense		15,568		7,362		47			22,977		15,026		7,178		46		22,250
Net income before taxes		9,259		5,482		213			14,954		3,091		3,082		1,066		7,239
Income tax expense		2,206		1,306		51			3,563		771		769		264		1,804
Net income	$	7,053	$	4,176	$	162		$	11,391	$	2,320	$	2,313	$	802	$	5,435

Total loans, net of deferred fees and costs	$	845,962	$	91,131	$	—		$	937,093	$	769,324	$	70,237	$	—	$	839,561
Total assets	$	970,034	$	90,434	$	142,199		$	1,202,667	$	825,180	$	69,730	$	117,888	$	1,012,798

Core Bank

Core Bank net income increased $4.7 million to $7.0 million for the nine months ended September 30, 2021 compared to $2.3 million for the same period in 2020. Net interest income increased $5.5 million to $24.2 million for the nine months ended September 30, 2021 from $18.7 million for the same period a year ago primarily due to increased loan and volume and reduced funding costs. Provision for loan losses decreased $0.7 million for the nine months ended September 30, 2021 compared to 2020 due to certain qualitative adjustments made in the nine months ended September 30, 2020 in response to the COVID-19 pandemic, offset by organic growth in the nine months ended September 30, 2021. Noninterest income increased $0.4 million for the nine months ended September 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 $0.6 million to $15.6 million for the 2021 period compared to $15.0 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.

Carbucks

Carbucks net income increased $1.9 million to $4.2 million for the nine months ended September 30, 2021 compared to $2.3 million for the same period in 2020. Net interest income increased $1.8 million to $12.8 million for the 2021 period from $11.0 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased $0.7 million for the nine months ended September 30, 2021 compared to 2020 due to improvements in certain qualitative factors related to COVID-19 in 2020. Noninterest expense increased $0.2 million to $7.4 million for the 2021 period compared to $7.2 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 net income decreased $0.6 million to $0.2 million for the nine months ended September 30, 2021 compared to net income of $0.8 million for the same period in 2020 primarily due to 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 September 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 September 30, 2021, cash and cash equivalents totaled $102.1 million. Included in this total was $63.8 million held at the FRB, $0.7 million held at the FHLB, and $31.8 million held at correspondent banks in interest-earning accounts.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources and uses of liquidity during the nine months ended September 30, 2021, and 2020 (in thousands):

	Nine Months Ended September 30,
	2021			2020
Investing activities:
Purchases of investments	$	(38,520	)	$	(55,191	)
Maturities and principal repayments of investments		19,644			9,275
Sales of investments		—			18,787
Net increase in loans		(58,435	)		(84,283	)

Financing activities:
Net increase in deposits	$	105,257		$	72,735
Repurchase of common stock		(3,946	)		—
Proceeds from FHLB advances		—			27,000
Repayment of FHLB advances					(6,000	)

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 nine months ended September 30, 2021 or 2020.

At September 30, 2021, we had $300.0 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 September 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 September 30, 2021 (in thousands):

	Total		Used		Unused
	Capacity		Capacity		Capacity
FHLB
Loan collateral capacity	$	348,966
Pledgeable marketable securities		127,252
FHLB totals		476,218	$	16,000	$	460,218
Fed funds lines		56,000		—		56,000
	$	532,218	$	16,000	$	516,218

Capital Resources. Shareholders’ equity increased $6.2 million to $92.7 million at September 30, 2021 compared to $86.5 million at December 31, 2020. This increase was primarily attributable to net income of $11.4 million, stock-based compensation of $0.5 million, and stock options exercised of $1.1 million partially offset by stock repurchases of $4.0 million, after-tax decreases in market value of AFS investment securities of $1.1 million and dividends declared of $1.6 million.

On June 16, 2021, the Company’s Board of Directors approved an extension of the duration of the previously announced common stock repurchase program (“Common Stock Repurchase Plan”) through December 31, 2021. The previous Common Stock Repurchase Plan was set to expire September 30, 2021. Pursuant to the Common Stock Repurchase Plan, the Company may repurchase 250,000 common shares including shares repurchased prior to the extension of the Common Stock Repurchase Plan. The Company has repurchased 210,446 shares for an aggregate amount of $3.9 million under the Common Stock Repurchase Plan. The remaining capacity under the Common Stock Repurchase Plan is 39,554 common shares.

On August 18, 2021, the Company’s Board of Directors approved the preferred stock repurchase program (“Preferred Stock Repurchase Plan”) to repurchase up to 75,000 shares of Series A preferred stock at a price acceptable to the Company through December 31, 2021. The Company has repurchased 4,608 shares for an aggregate amount of $0.1 million under the Preferred Stock Repurchase Plan. The remaining capacity under the Preferred Stock Repurchase Plan is 70,392 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 September 30, 2021 and December 31, 2020 (dollars in thousands).

	Actual					For Capital Adequacy Purposes (1)				To Be Well- Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio		Amount		Ratio
As of September 30, 2021:
Tier 1 Leverage Capital	$	118,269		10.03	%	$	47,177		>4%	$	58,971		>5%
Common Equity Tier 1 Capital	$	118,269		12.05	%	$	68,686		>7.0%	$	63,780		>6.5%
Tier 1 Risk-based Capital	$	118,269		12.05	%	$	83,404		>8.5%	$	78,498		>8%
Total Risk-based Capital	$	130,552		13.30	%	$	103,029		>10.5%	$	98,122		>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 September 30, 2021, and December 31, 2020 (in thousands).

	Actual					For Capital Adequacy Purposes (1)
	Amount		Ratio			Amount		Ratio
As of September 30, 2021:
Tier I Leverage Capital	$	99,187		8.41	%	$	47,187		>4%
Common Equity Tier 1 Capital	$	90,940		9.26	%	$	68,741		>7.0%
Tier I Risk-based Capital	$	99,187		10.10	%	$	83,472		>8.5%
Total Risk Based Capital	$	139,067		14.16	%	$	103,112		>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%.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

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 September 30, 2021. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of September 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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 September 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

(a) On May 14, 2021, the Company’s 2021 Form 10 registration statement pursuant to Section 12(g) of the Exchange Act went effective. During the quarter ended September 30, 2021 but prior to the filing of our Registration Statement on Form S-8 on August 30, 2021, certain employees of the Company exercised options for shares of our common stock. All of the stock options were issued pursuant to the GrandSouth Bancorporation 2009 Stock Option Plan. The table below reflects the date, number of options exercised, number of shares issued and the exercise price for each option exercised in the three months ending September 30, 2021.

Date of Exercise	Total Number of Options		Total Number of Common Shares Issued		Exercise Price
July 1, 2021		4,000		4,000	$	13.50
July 1, 2021		5,000		5,000		12.50
July 1, 2021		1,000		1,000		16.55
July 9, 2021		3,000		3,000		13.05
September 13, 2021		5,000		5,000		16.55
September 13, 2021		3,000		3,000		13.05

These options were awarded pursuant to the exemption from compliance with the registration requirements of the Securities Act provided by Rule 701 promulgated thereunder. The issuance of shares of the common pursuant to the exercise of such options was therefore also exempt from registration under the Securities Act pursuant to Rule 701.

(b) Not Applicable.

(c) The following table contains information regarding purchases of our common stock during the three months ended September 30, 2021 by or on behalf of the Company or any “affiliate purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act:

Period	Total Number of Common Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of the Publicly Announced Program		Maximum Number of Shares that May Yet Be Purchased Under the Program ⁽¹⁾
July 1, 2021-July 31, 2021		—		—		—		39,554
August 1, 2021-August 31, 2021		—		—		—		39,554
September 1, 2021-September 30, 2021		—		—		—		39,554

(1) On June 16, 2021, the Company’s Board of Directors approved an extension of the duration of the Common Stock Repurchase Plan through December 31, 2021. The previous Common Stock Repurchase Plan was set to expire September 30, 2021. Pursuant to the Common Stock Repurchase Plan, the Company may repurchase 250,000 common shares including shares repurchased prior to the extension of the Common Stock Repurchase Plan.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

(d) Exhibits. See Exhibit Index Below

Exhibit No.	Description
31.1	Certification of Chief Executive Officer of Grandsouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
31.2	Certification of Chief Financial Officer of Grandsouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
32.1	Certifications of the Chief Executive Officer and the Chief Financial Officer of Grandsouth Bancorporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial Statements filed in Inline XBRL format.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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: November 12, 2021	Grandsouth Bancorporation

	By:	/s/ John B. Garrett
	Name: John B. Garrett
	Title: Chief Financial Officer
	(Authorized Officer)