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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For the quarterly period ended:

 

June 30, 2021

 

Commission File Number: 000-31937

 

Grandsouth Bancorporation
(Exact name of registrant as specified in its charter)

 

South Carolina 57-1104394
(State of Incorporation) (I.R.S. Employer Identification No.)
   
381 Halton Road,  
Greenville, South Carolina 29607
(Address of principal executive offices) (Zip Code)
   

(864) 770-1000
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o Non-accelerated Filer x Smaller reporting company x Emerging growth company o
         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes o  No x

 

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

 

Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, no par value GRRB The OTC Market Group’s QTCQX

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On August 7, 2021, 5,140,681 shares of the issuer’s common stock (no par value), were issued and outstanding.

1

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

 

FORM 10-Q
TABLE OF CONTENTS

 

      Page No.
PART I. FINANCIAL INFORMATION    
       
Item 1. Financial Statements (Unaudited)   3
  Consolidated Balance Sheets – June 30, 2021 and December 31, 2020   3
  Consolidated Statements of Income – Three and Six Months Ended June 30, 2021 and 2020   4
  Consolidated Statements of Comprehensive Income – Three and Six Months Ended  June 30, 2021 and 2020   5
  Consolidated Statements of Changes in Shareholders’ Equity – Three and Six Months Ended June 30, 2021 and 2020   6
  Consolidated Statements of Cash Flows – Six Months Ended June 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   50
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   52
Item 4. Mine Safety Disclosures   52
Item 5. Other Information   52
Item 6. Exhibits   53
  Signatures   54

2

 

Item 1. Financial Statements
 
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
Consolidated Balance Sheets

 

   (Unaudited)   (Audited) 
         
   June 30,   December 31, 
(in thousands, except share data)  2021   2020 
Assets          
Cash and due from banks  $2,829   $6,216 
Interest-earning deposits   82,600    51,137 
Federal funds sold   1,010    5,672 
Cash and cash equivalents   86,439    63,025 
Investments - available for sale   131,576    110,707 
Other investments, at cost   4,226    6,252 
Loans receivable, net of deferred fees and costs   909,016    878,545 
Allowance for loan losses   (13,325)   (12,572)
Premises and equipment, net   16,961    16,680 
Other real estate owned   1,845    1,932 
Accrued interest receivable   5,495    5,704 
Bank owned life insurance   14,610    14,861 
Net deferred tax asset   2,696    2,501 
Goodwill   737    737 
Other assets   3,195    1,407 
Total assets  $1,163,471   $1,089,779 
           
Liabilities and Shareholders’ Equity          
Liabilities:          
Deposits:          
Noninterest-bearing  $252,050   $203,502 
Interest-bearing   764,332    742,978 
Total deposits   1,016,382    946,480 
Federal Home Loan Bank advances   16,000    16,000 
Junior subordinated notes   35,804    35,744 
Accrued interest payable   272    336 
Accrued expenses and other liabilities   5,526    4,694 
Total liabilities   1,073,984    1,003,254 
           
Commitments and contingencies (Note 6)          
           
Shareholders’ Equity:          
Preferred stock - no par; 20,000,000 authorized; Series A; 287,895 shares issued and outstanding        
Common stock - no par value; 20,000,000 shares authorized; 5,127,681 and 5,271,971 shares issued and outstanding        
Additional paid in capital   43,852    46,645 
Retained earnings   44,181    37,721 
Accumulated other comprehensive income   1,454    2,159 
Total shareholders’ equity   89,487    86,525 
           
Total liabilities and shareholders’ equity  $1,163,471   $1,089,779 

 

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

3

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
(in thousands, except per share data)  2021   2020   2021   2020 
Interest income:                    
Interest and fees on loans  $12,909   $11,314   $26,047   $24,410 
Taxable securities   358    284    626    654 
Tax-exempt securities   70    43    140    60 
Interest-earning deposits   23    16    42    89 
Other   31    69    65    129 
Total interest income   13,391    11,726    26,920    25,342 
                     
Interest expense:                    
Deposits   803    1,979    1,796    4,714 
Federal Home Loan Bank advances   36    48    71    81 
Junior subordinated notes   432    236    865    486 
Other borrowings               5 
Total interest expense   1,271    2,263    2,732    5,286 
Net interest income   12,120    9,463    24,188    20,056 
Provision for loan losses   309    656    551    1,739 
Net interest income after provision for loan losses   11,811    8,807    23,637    18,317 
                     
Noninterest income:                    
Service charges on deposit accounts   322    221    590    456 
Gain on sale of investment securities available for sale       392        392 
Bank owned life insurance   85    103    177    204 
Net gain on sale of premises and equipment   78    8    84    8 
Other   283    170    492    338 
Total noninterest income   768    894    1,343    1,398 
                     
Noninterest expenses:                    
Compensation and employee benefits   4,987    5,044    10,061    10,200 
Net occupancy   584    531    1,148    1,085 
Federal deposit insurance   172    100    325    231 
Professional and advisory   265    362    574    634 
Data processing   494    394    1,027    844 
Marketing and advertising   35    28    79    86 
Net cost of operation of other real estate owned   19    258    129    273 
Other   847    817    1,727    1,676 
Total noninterest expenses   7,403    7,534    15,070    15,029 
Income before taxes   5,176    2,167    9,910    4,686 
Income tax expense   1,213    532    2,353    1,139 
Net income   3,963    1,635    7,557    3,547 
Preferred stock dividends   (30)   (24)   (60)   (48)
Net income applicable to common shareholders  $3,933   $1,611   $7,497   $3,499 
                     
Earnings per common share:                    
Basic  $0.73   $0.30   $1.38   $0.64 
Diluted  $0.71   $0.29   $1.36   $0.64 
                     
Weighted average common shares outstanding:                    
Basic   5,134,112    5,201,951    5,167,763    5,208,275 
Diluted   5,259,588    5,258,363    5,254,908    5,276,435 

 

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

4

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended June 30,   Six months ended June 30, 
(in thousands)  2021   2020   2021   2020 
Net income  $3,963   $1,635   $7,557   $3,547 
Other comprehensive income (loss):                    
Change in unrealized holding gains (losses) on securities available for sale   1,095    598    (901)   1,957 
Reclassification adjustment for securities gains realized in net income       (392)       (392)
Other comprehensive income (loss), before tax   1,095    206    (901)   1,565 
Income tax effect related to items of other comprehensive income (loss)   (238)   (48)   196    (364)
Other comprehensive income (loss), after tax   857    158    (705)   1,201 
Comprehensive income  $4,820   $1,793   $6,852   $4,748 

 

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

5

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

 

                           Accumulated Other     
   Common Stock   Preferred Stock   Additional   Retained   Comprehensive     
(in thousands, except share and per share data)  Shares   Amount   Shares   Amount   Paid in Capital   Earnings   Income   Total 
Balances at December 31, 2020   5,271,971   $    287,895   $   $46,645   $37,721   $2,159   $86,525 
Net income                       3,594        3,594 
Other comprehensive loss , net of tax                           (1,562)   (1,562)
Stock compensation expense                   155            155 
Stock options exercised   36,656                460            460 
Stock repurchase   (135,230)               (2,392)           (2,392)
Common stock dividend ($0.10 per share)                       (527)       (527)
Preferred stock dividend ($0.105 per share)                       (30)       (30)
Balances at March 31, 2021   5,173,397        287,895        44,868    40,758    597    86,223 
                                         
Net income                       3,963        3,963 
Other comprehensive income, net of tax                           857    857 
Stock compensation expense                   153            153 
Stock options exercised   29,500                385            385 
Stock repurchase   (75,216)               (1,554)           (1,554)
Common stock dividend ($0.08 per share)                       (510)       (510)
Preferred stock dividend ($0.084 per share)                       (30)       (30)
Balances at June 30, 2021   5,127,681   $    287,895   $   $43,852   $44,181   $1,454   $89,487 
                                         
                           Accumulated Other     
   Common Stock   Preferred Stock   Additional   Retained   Comprehensive     
(in thousands, except share and per share data)  Shares   Amount   Shares   Amount   Paid in Capital   Earnings   Income   Total 
Balance at December 31, 2019   5,201,951   $    287,895   $   $45,625   $30,841   $184   $76,650 
Net income                       1,912        1,912 
Other comprehensive income, net of tax                           1,043    1,043 
Stock compensation expense                   213            213 
Stock options exercised   8,580                48            48 
Common stock dividend ($0.08 per share)                       (416)       (416)
Preferred stock dividend ($0.084 per share)                       (24)       (24)
Balance at March 31, 2020   5,210,531        287,895        45,886    32,313    1,227    79,426 
                                         
Net income                       1,635        1,635 
Other comprehensive income, net of tax                           158    158 
Stock compensation expense                    200            200 
Common stock dividend ($0.08 per share)                       (417)       (417)
Preferred stock dividend ($0.084 per share)                       (24)       (24)
Balance at June 30, 2020   5,210,531   $    287,895   $   $46,086   $33,507   $1,385   $80,978 

 

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

6

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)

 

   For the six months ended June 30, 
(in thousands)  2021   2020 
Cash flows from operating activities:          
Net income  $7,557   $3,547 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   722    229 
Investment amortization, net   678    378 
Provision for loan losses   551    1,739 
Provision for other real estate owned   87    242 
Stock-based compensation expense   308    413 
Income on bank owned life insurance, net   (177)   (204)
Gain on sale of investment securities available for sale       (392)
Gain on sale of fixed assets   (84)   (8)
Net change in operating assets and liabilities:          
Accrued interest receivable   209    95 
Other assets   (1,788)   295 
Accrued interest payable   (64)   (136)
Other liabilities   832    955 
Net cash provided by operating activities   8,831    7,153 
           
Cash flows from investing activities:          
Activity for investment securities available for sale:          
Purchases   (37,013)   (52,684)
Maturities/calls and principal repayments   14,565    6,761 
Sales       18,787 
Net increase in loans   (30,489)   (41,342)
Redemption of BOLI policies   429     
Proceeds from sale of fixed assets   87    37 
Purchase of fixed assets   (726)   (398)
Redemption of other investments, at cost   2,026    691 
Net cash provided used in investing activities   (51,121)   (68,148)
           
Cash flows from financing activities:          
Net increase in deposits   69,902    54,436 
Net increase in other borrowings       1,076 
Repurchase of common stock   (3,946)    
Proceeds from FHLB advances       20,000 
Cash received upon exercise of stock options   845    48 
Dividends paid on common stock   (1,037)   (833)
Dividends paid on preferred stock   (60)   (48)
Net cash provided by financing activities   65,704    74,679 
           
Net change in cash and cash equivalents   23,414    13,684 
           
Cash and cash equivalents, beginning of period   63,025    42,779 
           
Cash and cash equivalents, end of period  $86,439   $56,463 
           
Supplemental disclosures of cash flow information:          
Cash paid during the year for:          
Interest on deposits and other borrowings  $2,730   $5,421 
Income taxes   3,072    88 
           
Significant noncash investing activities:          
Real estate acquired in satisfaction of mortgage loans  $   $513 

 

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

7

 

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
 

Organization

 

GrandSouth Bancorporation (“we,” “us,” “our,” or the “Company”) was incorporated on September 7, 2000 for the purpose of becoming the holding company for GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to the Plan of Exchange, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company. The Company’s primary operation is its investment in the Bank. The Company also owns 100% of the common stock of GrandSouth Capital Trust I (the “Trust”), a Delaware statutory trust formed in 2006 to facilitate the issuance of trust preferred securities.

 

The Bank is a South Carolina state-chartered commercial bank that provides a full range of banking services. The Bank is insured and subject to the regulation of the Federal Deposit Insurance Corporation (“FDIC”) and is also subject to the regulation of the South Carolina State Board of Financial Institutions.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and the Bank. The accounts of the Trust are not consolidated with the Company. In consolidation all significant intercompany accounts and transactions have been eliminated.

 

Business Segments

 

Accounting Standards Codification (“ASC”) Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s two reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. Please refer to “Note 9 – Reportable Segments” for further information on the reporting for the Company’s two business segments.

 

Estimates

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of deferred tax assets.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Form 10 for the year ended December 31, 2020, filed with the SEC on March 30, 2021 (the “2020 Form 10”). In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

Reclassification

 

Certain amounts in the prior year’s financial statements may have been reclassified to conform to the current year’s presentation. The reclassifications had no effect on our results of operations or financial condition as previously reported.

 

Recent Accounting Standards Updates

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update eliminates Step 2 from the goodwill impairment test, which required an entity to calculate the implied fair value of goodwill by valuing a reporting unit’s assets and liabilities using the same process that would be required to value assets and liabilities in a business combination. Instead, the amendments require that an entity perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company adopted this update as of January 1, 2020, with no material impact on the consolidated financial statements.

8

 

In September 2016, the FASB issued amendments to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in the update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected thereby providing financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by the reporting entity. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. The Company has formed a cross-functional committee to provide corporate governance over the implementation of this update, has evaluated data sources and made process updates to capture additional relevant data, has identified a service provider to perform the calculation, and continues to attend seminars and forums specific to this update. The Company also engaged the service provider to assist with the implementation of the standard. While we continue to evaluate the impact the new guidance will have on our financial position and results of operations, we currently expect the new guidance may result in an increase to our allowance for credit losses given the change to estimated losses over the contractual life of the loan portfolio. The amount of any change to our allowance will depend, in part, upon the composition of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act included a number of provisions that were applicable to the Company, including the following:

 

Accounting relief for troubled debt restructures (“TDRs”)The CARES Act provided that modifications under certain forbearance conditions for loans that were not more than 30 days past due at December 31, 2020 will not be considered TDRs for regulatory reporting and GAAP.

 

Paycheck Protection Program (“PPP”): The CARES Act created the PPP through the Small Business Administration (“SBA”), which allowed the Company to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls or restores payrolls afterwards.

 

NOTE 2. INVESTMENTS
 

The amortized cost and estimated fair values of available-for-sale (“AFS”) securities as of June 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

 

   June 30, 2021 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
U.S. government agencies  $7,467   $42   $(26)  $7,483 
State and municipal obligations   19,931    1,045    (195)   20,781 
Mortgage-backed securities - agency   41,553    483    (186)   41,850 
Collateralized mortgage obligations - agency   50,586    843    (292)   51,137 
Asset-backed securities   2,732        (11)   2,721 
Corporate bonds   7,450    243    (89)   7,604 
Total  $129,719   $2,656   $(799)  $131,576 

9

 

   December 31, 2020 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
State and municipal obligations  $16,684   $1,136   $   $17,820 
Mortgage-backed securities - agency   31,056    463    (32)   31,487 
Collateralized mortgage obligations - agency   49,441    1,194    (75)   50,560 
Asset-backed securities   6,268    5    (38)   6,235 
Corporate bonds   4,500    127    (22)   4,605 
Total  $107,949   $2,925   $(167)  $110,707 

 

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

 

   June 30, 2021 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
U.S. government agencies  $1,458   $26   $   $   $1,458   $26 
State and municipal obligations   3,622    195            3,622    195 
Mortgage-backed securities - agency   20,997    186            20,997    186 
Collateralized mortgage obligations - agency   11,543    145    9,826    147    21,369    292 
Asset-backed securities           2,721    11    2,721    11 
Corporate bonds   2,860    89            2,860    89 
Total  $40,480   $641   $12,547   $158   $53,027   $799 
     
   December 31, 2020 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Mortgage-backed securities - agency  $6,223   $32   $   $   $6,223   $32 
Collateralized mortgage obligations - agency   20,673    75            20,673    75 
Asset-backed securities           2,808    38    2,808    38 
Corporate bonds   1,478    22            1,478    22 
Total  $28,374   $129   $2,808   $38   $31,182   $167 

10

 

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

 

 

   June 30, 2021 
   Less Than 12 Months   More Than 12 Months   Total 
U.S. government agencies   1        1 
State and municipal obligations   3        3 
Mortgage-backed securities - agency   6        6 
Collateralized mortgage obligations - agency   4    3    7 
Asset-backed securities       2    2 
Corporate bonds   7        7 
    21    5    26 

 

   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 June 30, 2021 and December 31, 2020 represent temporary impairment. The unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

 

   Three Months Ended   Six Months Ended 
   June 30, 2020   June 30, 2020 
         
AFS          
Gross proceeds  $18,787   $18,787 
Gross realized gains   392    392 

  

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

 

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

 

   June 30, 2021 
   Amortized Cost   Fair Value 
Over 5 years through 10 years  $14,410   $14,691 
Over 10 years   20,438    21,177 
Total securites other than asset-backed and mortgage-backed securities   34,848    35,868 
           
Mortgage-backed securities   41,553    41,850 
Collaterized mortgage obigations   50,586    51,137 
Asset-backed securities   2,732    2,721 
Total  $129,719   $131,576 

 

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

 

There were no AFS securities pledged against deposits and borrowings at June 30, 2021 or at December 31, 2020.

11

 

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

 

 

   June 30, 2021   December 31, 2020 
Federal Home Loan Bank stock  $1,225   $1,501 
Investment in Trust Preferred Securities   247    247 
Certificates of deposit   2,254    4,004 
Other investments   500    500 
Total other investments, at cost  $4,226   $6,252 

  

Certificates of deposit totaling $1.2 million and $0.8 million were pledged against customer deposits at June 30, 2021, and December 31, 2020, respectively. Federal Home Loan Bank of Atlanta (“FHLB”) stock is used to collateralize advances with the FHLB.

 

NOTE 3. LOANS RECEIVABLE

 

Loans receivable are summarized in the table below as of the dates indicated (in thousands):

 

   June 30,   December 31, 
   2021   2020 
Real estate loans:          
One-to-four family residential  $117,323   $114,119 
Commercial real estate   405,341    369,706 
Home equity loans and lines of credit   19,046    17,174 
Residential construction   33,533    30,989 
Other construction and land   70,447    68,611 
Total real estate loans   645,690    600,599 
Commercial   230,494    243,617 
Consumer   33,817    35,362 
Total commercial and consumer   264,311    278,979 
Loans receivable, gross   910,001    879,578 
Net deferred loan fees   (909)   (956)
Unaccreted discount   (261)   (274)
Unamortized premium   185    197 
Loans receivable, net of deferred fees and costs  $909,016   $878,545 

  

Commercial loans includes PPP loans with recorded investments of $12.5 million and $22.5 million as of June 30, 2021 and December 31, 2020, respectively. Net deferred fee income recognized on PPP loans in the six months ended June 30, 2021 totaled $0.6 million and is included in loan interest income with $0.5 million remaining to be recognized in future periods.

 

The Bank had $46.6 million and $41.1 million of loans pledged as collateral to secure funding with the FHLB at June 30, 2021 and December 31, 2020, respectively.

12

 

NOTE 4. ALLOWANCE FOR LOAN LOSSES

 

 

The changes in the allowance for loan losses by portfolio segment are presented in the following tables for the periods indicated (in thousands):

 

   Three Months Ended June 30, 2021 
                   Other             
   One-to-four Family   Commercial   Home Equity and   Residential   Construction             
   Residential   Real Estate   Lines of Credit   Construction   and Land   Commercial   Consumer   Total 
Beginning balance  $1,270   $4,411   $207   $320   $918   $5,615   $218   $12,959 
Provision   (47)   303    19    52    (158)   99    41    309 
Charge-offs   1                    (98)       (97)
Recoveries   3                17    134        154 
Ending balance  $1,227   $4,714   $226   $372   $777   $5,750   $259   $13,325 
     
   Three Months Ended June 30, 2020 
                   Other             
   One-to-four Family   Commercial   Home Equity and   Residential   Construction             
   Residential   Real Estate   Lines of Credit   Construction   and Land   Commercial   Consumer   Total 
Beginning balance  $1,234   $3,701   $220   $123   $575   $4,930   $173   $10,956 
Provision   87    240    17    88    135    139    (50)   656 
Charge-offs                       (651)       (651)
Recoveries   2                    382    24    408 
Ending balance  $1,323   $3,941   $237   $211   $710   $4,800   $147   $11,369 
     
   Six Months Ended June 30, 2021 
                   Other             
   One-to-four Family   Commercial   Home Equity and   Residential   Construction             
   Residential   Real Estate   Lines of Credit   Construction   and Land   Commercial   Consumer   Total 
Beginning balance  $1,297   $4,559   $231   $389   $843   $5,118   $135   $12,572 
Provision   (60)   155    (5)   (17)   (83)   437    124    551 
Charge-offs   (29)                   (204)       (233)
Recoveries   19                17    399        435 
Ending balance  $1,227   $4,714   $226   $372   $777   $5,750   $259   $13,325 
     
   Six Months Ended June 30, 2020 
                   Other             
   One-to-four Family   Commercial   Home Equity and   Residential   Construction             
   Residential   Real Estate   Lines of Credit   Construction   and Land   Commercial   Consumer   Total 
Beginning balance  $1,098   $3,122   $188   $84   $584   $5,024   $187   $10,287 
Provision   223    819    49    127    126    433    (38)   1,739 
Charge-offs                       (1,211)   (26)   (1,237)
Recoveries   2                    554    24    580 
Ending balance  $1,323   $3,941   $237   $211   $710   $4,800   $147   $11,369 

13

 

The allocation of the allowance for loan losses and the recorded investment in loans is presented in the following tables by portfolio segment and reserving methodology as of the dates indicated (in thousands)

 

   June 30, 2021 
                   Other             
   One-to-four Family   Commercial   Home Equity and   Residential   Construction             
   Residential   Real Estate   Lines of Credit   Construction   and Land   Commercial   Consumer   Total 
Allowance for loan losses                                
Individually evaluated for impairment  $22   $   $   $   $        $    $22 
Collectively evaluated for impairment   1,205    4,714    226    372    777    5,750    259    13,303 
  $1,227   $4,714   $226   $372   $777   $5,750   $259   $13,325 
                                         
Loans Receivable                                        
Individually evaluated for impairment  $635   $1,526   $   $   $   $   $   $2,161 
Collectively evaluated for impairment   116,515    403,168    19,088    33,347    70,175    230,702    33,860    906,855 
Loans and Leases Receivable, Gross  $117,150   $404,694   $19,088   $33,347   $70,175   $230,702   $33,860   $909,016 
     
   December 31, 2020 
                   Other             
   One-to-four Family   Commercial   Home Equity and   Residential   Construction             
   Residential   Real Estate   Lines of Credit   Construction   and Land   Commercial   Consumer   Total 
Allowance for loan losses                                
Individually evaluated for impairment  $   $   $   $   $   $1   $   $1 
Collectively evaluated for impairment   1,297    4,559    231    389    843    5,117    135    12,571 
   $1,297   $4,559   $231   $389   $843   $5,118   $135   $12,572 
                                         
Loans Receivable                                        
Individually evaluated for impairment  $281   $987   $   $   $126   $320   $66   $1,780 
Collectively evaluated for impairment   113,658    368,149    17,213    30,838    68,160    243,401    35,346    876,765 
Loans and Leases Receivable, Gross  $113,939   $369,136   $17,213   $30,838   $68,286   $243,721   $35,412   $878,545 

 

Portfolio Quality Indicators

 

The Company’s loan portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.

  

The Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:

  

Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated. 

 

Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted.  This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral.

 

Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms.  

 

Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable.

 

Loss (9) – Collectability is unlikely resulting in immediate charge-off.

14

 

Description of Segment and Class Risks

 

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.

 

One-to-four family residential

 

We centrally underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. We also evaluate the value and marketability of the collateral. Common risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.

 

Commercial real estate

 

Commercial mortgage loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates.

 

Home equity and lines of credit

 

Home equity loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines of credit in excess of the collateral value if there have been significant declines since origination.

 

Residential construction and other construction and land

 

Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial construction and land development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.

15

 

Commercial

 

We centrally underwrite each of our commercial loans, which includes agricultural loans and specialty floor-plan lending, based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses, including the experience and background of the principals of such businesses. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral. Common risks to specialty floor-plan lending includes adverse conditions in the automobile market and risks associated with declining values. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.

 

Consumer

 

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since the date of loan origination in excess of principal repayment.

 

The recorded investment in loans by portfolio segment and loan grade is presented in the following tables as of the dates indicated (in thousands):

 

    June 30, 2021 
    One-to-Four       Home Equity       Other             
Loan   Family   Commercial   and Lines of   Residential   Construction and             
Grade   Residential   Real Estate   Credit   Construction   Land   Commercial   Consumer   Total 
1   $569   $1,472   $   $   $222   $1,513   $27,299   $31,075 
2        257                1,566    2    1,825 
3    9,674    51,152    2,919        12,004    12,317    107    88,173 
4    94,302    299,477    14,124    30,023    45,440    109,532    5,028    597,926 
5    9,925    44,302    1,909    3,324    12,493    104,254    1,302    177,509 
6    1,563    6,346    58        16    1,093    47    9,123 
7    1,117    1,688    78            427    75    3,385 
Total   $117,150   $404,694   $19,088   $33,347   $70,175   $230,702   $33,860   $909,016 
      
    December 31, 2020 
    One-to-Four       Home Equity       Other             
Loan   Family   Commercial   and Lines of   Residential   Construction and             
Grade   Residential   Real Estate   Credit   Construction   Land   Commercial   Consumer   Total 
1   $   $   $   $   $   $432   $168   $600 
2        269                984    21    1,274 
3    10,946    50,287    834    190    17,202    21,624    304    101,387 
4    92,055    281,473    14,363    25,359    38,869    124,579    33,671    610,369 
5    8,898    29,716    1,856    5,289    12,074    94,496    1,108    153,437 
6    1,231    5,453    9            1,030    54    7,777 
7    809    1,938    151        141    576    86    3,701 
Total   $113,939   $369,136   $17,213   $30,838   $68,286   $243,721   $35,412   $878,545 

16

 

Delinquency Analysis of Loans by Class

 

An aging analysis of the recorded investment of loans by portfolio segment, including loans on nonaccrual status as well as accruing TDRs and purchased student loans for which there is a 98% guarantee, is presented in the following tables as of the dates indicated (in thousands).

 

   June 30, 2021 
   30-59 Days Past   60-89 Days Past   90 Days and Over           Total Loans 
   Due   Due   Past Due   Total Past Due   Current   Receivable 
One-to-four family residential  $   $   $   $   $117,150   $117,150 
Commercial real estate                   404,694    404,694 
Home equity and lines of credit                   19,088    19,088 
Residential construction                   33,347    33,347 
Other construction and land                   70,175    70,175 
Commercial   3            3    230,699    230,702 
Consumer   890    551    2,450    3,891    29,969    33,860 
Total  $893   $551   $2,450   $3,894   $905,122   $909,016 
     
   December 31, 2020 
   30-59 Days Past   60-89 Days Past   90 Days and Over           Total Loans 
   Due   Due   Past Due   Total Past Due   Current   Receivable 
One-to-four family residential  $   $   $15   $15   $113,924   $113,939 
Commercial real estate                   369,136    369,136 
Home equity and lines of credit                   17,213    17,213 
Residential construction                   30,838    30,838 
Other construction and land                   68,286    68,286 
Commercial   6        2    8    243,713    243,721 
Consumer   1,840    727    2,549    5,116    30,296    35,412 
Total  $1,846   $727   $2,566   $5,139   $873,406   $878,545 

17

 

Impaired Loans

 

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

 

   June 30, 2021   December 31, 2020 
       Unpaid Principal   Specific       Unpaid Principal   Specific 
   Recorded Balance   Balance   Allowance   Recorded Balance   Balance   Allowance 
Loans without a valuation allowance                              
One-to-four family residential  $281   $281   $   $281   $352   $ 
Commercial real estate   1,526    1,526        987    994     
Other construction and land               126    152     
Commercial               308    434     
Consumer               66    68     
    1,807    1,807        1,768    2,000     
                               
Loans with a valuation allowance                              
One-to-four family residential   354    354    22             
Commercial               12    12    1 
    354    354    22    12    12    1 
                               
Total                              
One-to-four family residential   635    635    22    281    352     
Commercial real estate   1,526    1,526        987    994     
Other construction and land               126    152     
Commercial               320    446    1 
Consumer               66    68     
   $2,161   $2,161   $22   $1,780   $2,012   $1 

 

The average recorded investment in impaired loans by portfolio segment and interest income recognized on those impaired loans is presented in the following table for the periods indicated (in thousands):

 

   Three Months Ended June 30, 
   2021   2020 
   Average   Interest   Average   Interest 
   Investment in   Income   Investment in   Income 
   Impaired Loans   Recognized   Impaired Loans   Recognized 
Loans without a valuation allowance                    
One-to-four family residential  $282   $3   $359   $ 
Commercial real estate   1,542    18    4,611    20 
Other construction and land           157    2 
Commercial           587     
Consumer           84     
    1,824    21    5,798    22 
                     
Loans with a valuation allowance                    
One-to-four family residential   356    3         
Commercial real estate                
Other construction and land                
Commercial           353    2 
Consumer           15     
    356    3    368    2 
                     
Total                    
One-to-four family residential   638    6    359     
Commercial real estate   1,542    18    4,611    20 
Other construction and land           157    2 
Commercial           940    2 
Consumer           99     
   $2,180   $24   $6,166   $24 

18

 

   Six Months Ended June 30, 
   2021   2020 
   Average   Interest   Average   Interest 
   Investment in   Income   Investment in   Income 
   Impaired Loans   Recognized   Impaired Loans   Recognized 
Loans without a valuation allowance                    
One-to-four family residential  $283   $6   $   $5 
Commercial real estate   1,562    40        24 
Other construction and land                
Commercial           388    2 
Consumer           15    1 
    1,845    46    403    32 
                     
Loans with a valuation allowance                    
One-to-four family residential   357    6    361    5 
Commercial real estate           4,634    44 
Other construction and land           158    2 
Commercial           611    2 
Consumer           85    1 
    357    6    5,849    54 
                     
Total                    
One-to-four family residential   640    12    361    10 
Commercial real estate   1,562    40    4,634    68 
Other construction and land           158    2 
Commercial           999    4 
Consumer           100    2 
   $2,202   $52   $6,252   $86 

 

Nonperforming Loans

 

The recorded investment of nonperforming loans by portfolio segment is presented in the table below as of the dates indicated (in thousands):

 

   June 30, 2021   December 31, 2020 
One-to-four family residential  $22   $39 
Commercial real estate   29    31 
Other construction and land       126 
Commercial   166    324 
Consumer   6    13 
Non-performing loans  $223   $533 

19

 

TDRs

 

The recorded investment in performing and nonperforming TDRs by portfolio segment is presented in the tables below as of the dates indicated (in thousands):

 

   June 30, 2021 
   Performing   Nonperforming   Total 
   TDRs   TDRs   TDRs 
One-to-four family residential  $589   $22   $611 
Commercial real estate   910        910 
Other construction and land            
Commercial   7    126    133 
Consumer   48    6    54 
   $1,554   $154   $1,708 
                
   December 31, 2020 
   Performing   Nonperforming   Total 
   TDRs   TDRs   TDRs 
One-to-four family residential  $241   $40   $281 
Commercial real estate   956        956 
Other construction and land       126    126 
Commercial       132    132 
Consumer   57    10    67 
   $1,254   $308   $1,562 

 

Loan modifications that were deemed TDRs at the time of the modification are presented in the table below for the periods indicated (in thousands):

 

      Number of TDR  Pre-Modification   Post-Modification 
   Modification Type  Loans  Recorded Investment   Recorded Investment 
Three months ended June 30, 2020                
   Extended payment terms  2  $149   $148 

 

There were no loan modifications deem TDRs for the three months ended June 30, 2021.

 

      Number of TDR  Pre-Modification   Post-Modification 
   Modification Type  Loans  Recorded Investment   Recorded Investment 
Six months ended June 30, 2021                
   Interest rate concession  1  $357   $357 
                 
Six months ended June 30, 2020                
   Extended payment terms  3  $173   $172 

 

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

20

 

NOTE 5. DEPOSITS

 

 

Deposit balances and interest expense by type of deposit are summarized as follows as of and for the periods indicated (in thousands):

 

 

   As of and for the   As of and for the Year Ended 
   Six Months Ended June 30,   December 31, 
   2021   2020   2020 
       Interest       Interest       Interest 
   Balance   Expense   Balance   Expense   Balance   Expense 
Noninterest-bearing demand  $252,050   $   $190,672   $   $203,502   $ 
Interest-bearing demand   72,236    84    37,786    21    63,614    75 
Money Market   440,716    915    299,216    1,052    384,838    1,915 
Savings   13,038    6    8,211    4    10,584    8 
Time Deposits   238,342    791    332,200    3,637    283,942    5,416 
Total deposits  $1,016,382   $1,796   $868,085   $4,714   $946,480   $7,414 

 

NOTE 6. COMMITMENTS AND CONTINGENCIES

 

 

In the normal course of business, we make various commitments and incur certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At June 30, 2021, commitments to extend credit and standby letters of credit totaled $294.8 million. We do not anticipate any material losses as a result of these transactions.

 

In the normal course of business, the Company is periodically involved in litigation and other matters. In the opinion of the Company’s management, none of the litigation and other matters are expected to have a material adverse effect on the accompanying consolidated financial statements.

 

NOTE 7. EARNINGS PER SHARE

 

 

The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock as of the dates indicated (in thousands, except per share data):

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
Numerator:                    
Net income  $3,963   $1,635   $7,557   $3,547 
Less: Preferred stock dividends   (30)   (24)   (60)   (48)
Net income applicable to common equity   3,933    1,611    7,497    3,499 
Undistributed earnings allocated to participating securities   (190)   (65)   (357)   (146)
Net income applicable to common stockholders  $3,743   $1,546   $7,140   $3,353 
                     
Denominator:                    
Basic - Total weighted-average basic shares outstandings   5,134,112    5,201,951    5,167,763    5,208,275 
Stock options   125,476    56,412    87,145    68,160 
Diluted - Total weighted-average diluted shares outstanding   5,259,588    5,258,363    5,254,908    5,276,435 
                     
Basic income per share  $0.73   $0.30   $1.38   $0.64 
Diluted income per share  $0.71   $0.29   $1.36   $0.64 

 

The Company excluded 102,500 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $24.20 from the computation of diluted earnings per share for the three and six months ended June 30, 2021 because of their antidilutive effect.

 

The Company excluded 556,000 and 471,000 potentially dilutive shares of common stock issuable upon exercise of stock options with weighted average exercise prices of $16.04 and $16.44 from the computation of diluted earnings per share for the three and six months ended June 30, 2020, respectively, because of their antidilutive effect.

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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 June 30, 2021   Six Months Ended June 30, 2021 
   AFS Securities   Total   AFS Securities   Total 
Balance, beginning of period  $597   $597   $2,159   $2,159 
Change in net unrealized holding gains on AFS securities   1,095    1,095    (901)   (901)
Income tax effect   (238)   (238)   196    196 
Balance, end of period  $1,454   $1,454   $1,454   $1,454 

 

   Three Months Ended June 30, 2020   Six Months Ended June 30, 2020 
   AFS Securities   Total   AFS Securities   Total 
Balance, beginning of period  $1,227   $1,227   $184   $184 
Change in net unrealized holding losses on AFS securities   598    598    1,957    1,957 
Reclassification adjustment for securities gains realized in net income   (392)   (392)   (392)   (392)
Income tax effect   (48)   (48)   (364)   (364)
Balance, end of period  $1,385   $1,385   $1,385   $1,385 

 

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

 

NOTE 9. REPORTABLE SEGMENTS

 

 

Grandsouth’s banking segment Grandsouth Bank conducts traditional banking operations (as Grandsouth Bank, or Core Bank) and offers specialty lending (as Carbucks). The Core Bank and Carbucks are Grandsouth’s primary reportable segments for management financial reporting. This business segment structure along primary lending products is consistent with the way management internally reviews financial information and allocates resources. Results for prior periods have been restated for comparability.

 

Segment information is shown in the tables below as of and for the periods indicated (in thousands).

 

   As of and for the Three Months Ended June 30, 2021   As of and for the Three Months Ended June 30, 2020 
   Core Bank   Carbucks   Other   Total   Core Bank   Carbucks   Other   Total 
Interest income  $8,449   $4,512   $430   $13,391   $7,861   $3,534   $331   $11,726 
Interest expense   499    340    432    1,271    1,700    327    236    2,263 
Net interest income   7,950    4,172    (2)   12,120    6,161    3,207    95    9,463 
Provision for loan losses   68    241        309    698    (42)       656 
Noninterest income   577    38    153    768    271    127    496    894 
Noninterest expense   4,941    2,440    22    7,403    5,200    2,315    19    7,534 
Net income before taxes   3,518    1,529    129    5,176    534    1,061    572    2,167 
Income tax expense   826    356    31    1,213    132    261    139    532 
Net income  $2,692   $1,173   $98   $3,963   $402   $800   $433   $1,635 
                                              .                  
Total loans, net of deferred fees and costs  $821,535   $87,481   $   $909,016   $736,487   $60,245   $   $796,732 
Total assets  $930,199   $86,833   $146,439   $1,163,471   $815,737   $60,234   $117,500   $993,471 

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   As of and for the Six Months Ended June 30, 2021   As of and for the Six Months Ended June 30, 2020 
   Core Bank   Carbucks   Other   Total   Core Bank   Carbucks   Other   Total 
Interest income  $17,026   $9,125   $769   $26,920   $15,901   $8,723   $718   $25,342 
Interest expense   1,162    705    865    2,732    3,742    1,058    486    5,286 
Net interest income   15,864    8,420    (96)   24,188    12,159    7,665    232    20,056 
Provision for loan losses   591    (40)       551    1,602    137        1,739 
Noninterest income   1,024    75    244    1,343    528    274    596    1,398 
Noninterest expense   10,158    4,875    37    15,070    9,850    5,148    31    15,029 
Net income before taxes   6,139    3,660    111    9,910    1,235    2,654    797    4,686 
Income tax expense   1,457    869    27    2,353    301    646    192    1,139 
Net income  $4,682   $2,791   $84   $7,557   $934   $2,008   $605   $3,547 
                                              .                  
Total loans, net of deferred fees and costs  $821,535   $87,481   $   $909,016   $736,487   $60,245   $   $796,732 
Total assets  $930,199   $86,833   $146,439   $1,163,471   $815,737   $60,234   $117,500   $993,471 

 

Core Bank – The bank’s primary business is to provide traditional deposit and lending products and services to commercial and retail banking clients.

 

Carbucks – The banking division that provides specialty floor plan lending to small automobile dealers in over 20 states.

 

Other – Includes AFS securities portfolio, BOLI, parent company activities, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.

 

NOTE 10. FAIR VALUE DISCLOSURES

 

 

Overview

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).

 

Fair Value Hierarchy

 

Level 1 - Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.

 

Level 3 - Valuation is generated from techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

 

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s valuation process.

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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):

 

   June 30, 2021 
   Level 1   Level 2   Level 3   Total 
Assets:                    
U.S. government agencies  $   $7,483   $   $7,483 
State and municipal obligations       20,781        20,781 
Mortgage-backed securities - agency       41,850        41,850 
Collateralized mortgage obligations - agency       51,137        51,137 
Asset-backed securities       2,721        2,721 
Corporate bonds           7,604    7,604 
Total recurring assets at fair value  $   $123,972   $7,604   $131,576 
     
   December 31, 2020 
   Level 1   Level 2   Level 3   Total 
Assets:                    
State and municipal obligations  $   $17,820   $   $17,820 
Mortgage-backed securities - agency       31,487        31,487 
Collateralized mortgage obligations - agency       50,560        50,560 
Asset-backed securities       6,235        6,235 
Corporate bonds           4,605    4,605 
Total recurring assets at fair value  $   $106,102   $4,605   $110,707 

 

There were no financial liabilities measured at fair value on a recurring basis as of June 30, 2021, or December 31, 2020.

24

 

The changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are presented in the following table for the years indicated (in thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
Balance at beginning of period  $5,093   $500   $4,605   $ 
Corporate bond additions   2,450        2,950    500 
Corporate bond fair value adjustments   61        49     
                     
Balance at end of period  $7,604   $500   $7,604   $500 

 

Financial Assets Measured on a Nonrecurring Basis

 

The Company uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:

 

Impaired Loans

 

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured using the present value of expected future cash flows are not deemed to be measured at fair value.

 

REO

 

REO obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. REO carried at fair value is classified as Level 3.

25

 

Nonfinancial assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):

 

   June 30, 2021 
   Level 1   Level 2   Level 3   Total 
Real estate owned:                    
Commercial real estate  $   $   $451   $451 
Other construction and land           1,394    1,394 
Total  $   $   $1,845   $1,845 
                     
   December 31, 2020 
   Level 1   Level 2   Level 3   Total 
Collateral dependent impaired loans:                    
One-to four family residential  $   $   $40   $40 
Commercial real estate           31    31 
Other construction and land           126    126 
Commercial           320    320 
Consumer           10    10 
Real estate owned:                    
Commercial real estate           513    513 
Other construction and land           1,419    1,419 
Total  $   $   $2,459   $2,459 

 

There were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2021, or December 31, 2020.

 

Impaired loans totaling $2.2 million at June 30, 2021 and $1.3 million at December 31, 2020 were measured using the present value of expected future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at June 30, 2021 and December 31, 2020.

 

         30-Jun-21  December 31, 2020
   Valuation Technique  Unobservable Input  General Range  General Range
Impaired loans  Discounted Appraisals  Collateral discounts  0% - 30%  0% - 30%
Real estate owned  Discounted Appraisals  Collateral discounts and estimated selling cost  0% - 30%  0% - 40%
Corporate bonds  Discounted Cash Flows  Recent similar executed financing transactions  0% - 7%  0% - 5.5%

 

Fair Value of Financial Assets and Financial Liabilities

 

The estimated fair value of the Company’s financial assets and financial liabilities are summarized as follows at the dates indicated (in thousands):

 

       Fair Value Measurements at June 30, 2021 
   Carrying                 
   Amount   Total   Level 1   Level 2   Level 3 
Assets:                         
Cash and equivalents  $86,439   $86,439   $86,439   $   $ 
Securities available for sale   131,576    131,576        123,972    7,604 
Loans receivable, net of deferred fees and costs   909,016    903,771            903,771 
Other investments, at cost   4,226    4,226        4,226     
Accrued interest receivable   5,495    5,495        5,495     
BOLI   14,610    14,610        14,610     
                          
Liabilities:                         
Demand deposits, money market and savings  $778,040   $778,040   $   $778,040   $ 
Time deposits   238,342    238,681        238,681      
Federal Home Loan Bank advances   16,000    16,159        16,159     
Junior subordinated debentures   35,804    35,935        35,935     
Accrued interest payable   272    272        272     

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       Fair Value Measurements at December 31, 2020 
   Carrying                 
   Amount   Total   Level 1   Level 2   Level 3 
Assets:                         
Cash and equivalents  $63,025   $63,025   $63,025   $   $ 
Securities available for sale   110,707    110,707        106,102    4,605 
Loans receivable, net of deferred fees and costs   878,545    869,602            869,602 
Other investments, at cost   6,252    6,252        6,252     
Accrued interest receivable   5,704    5,704        5,704     
BOLI   14,861    14,861        14,861     
                          
Liabilities:                         
Demand deposits, money market and savings  $662,538   $580,030   $   $580,030   $ 
Time deposits   283,942    284,655        284,655      
Federal Home Loan Bank advances   16,000    16,274        16,274     
Junior subordinated debentures   35,744    34,234        34,234     
Accrued interest payable   336    336        336     

 

NOTE 11. SHARE REPURCHASES

 

 

On June 16, 2021, the Company’s Board of Directors approved an extension of the duration of the previously announced common stock repurchase program through December 31, 2021. The previous common stock repurchase plan was set to expire June 30, 2021. Repurchased shares will become treasury shares and may be utilized for general corporate purposes.

 

The following table summarizes repurchase activity for the six months ended June 30, 2021.

 

       Average   Total Number of   Maximum Number 
   Total Number   Price   Shares Purchased as   of Shares that May 
   of Shares   Paid per   Part of the Publicly   Yet Be Purchased 
Period  Purchased   Share   Announced Program   Under the Program 
January 1, 2021 - March 31, 2021   135,230   $17.65    135,230    114,770 
April 1, 2021 - April 30, 2021   46,978    20.85    182,208    67,792 
May 1, 2021 - May 31, 2021   28,238    20.25    210,446    39,554 
June 1, 2021 - June 30, 2021           210,446    39,554 

 

NOTE 12. SUBSEQUENT EVENTS

 

 

Management has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30, 2021. The Company does not believe there were any material subsequent events during this period that require further recognition or disclosure in the unaudited consolidated financial statements included in this report other than the item noted below.

 

On July 19, 2021, the Company’s Board of Directors approved regular cash dividends of $0.10 per common share and $0.105 per Series A preferred share payable on August 13, 2021 to shareholders of record on August 4, 2021.

27

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1932 (the “Exchange Act”), which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

 

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

 

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

 

Restrictions or conditions imposed by our regulators on our operations;
Increases in competitive pressure in the banking and financial services industries;
Changes in access to funding or increased regulatory requirements with regard to funding;
Changes in deposit flows;
Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
Credit losses due to loan concentration;
Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
Our ability to attract and retain key personnel;
The success and costs of our expansion into potential new markets;
Changes in the interest rate environment which could reduce anticipated or actual margins;
Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the new presidential administration and Democratic control of Congress;
Changes in economic conditions in the United States and the strength of the local economies in which we conduct our operations, including, but not limited to, due to the continuing negative impacts and disruptions resulting from the outbreak of COVID-19 on the economies and communities we serve, which may have an adverse impact on our business, operations and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally;
Changes occurring in business conditions and inflation;
Increased cybersecurity risk, including potential business disruptions or financial losses;
Changes in technology;
The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
Changes in monetary and tax policies;
Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
The rate of delinquencies and amounts of loans charged-off;
The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

28

 

Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
Adverse changes in asset quality and resulting credit risk-related losses and expenses;
Changes in accounting policies, practices or guidelines;
Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed; and
The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, (including the potential negative effects of COVID-19 on trade) supply chains disruptions in transportation, war or terrorist activities, essential utility outages or trade disputes and tariffs.

 

For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Form 10 as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021 (“2020 Form 10”).

 

Non-GAAP Measures

 

This release includes financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). This financial information includes certain operating performance measures such as “Tangible book value per common share, outstanding”.

 

Management has included these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses these measures in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies.

29

 

Critical Accounting Policies and Estimates

 

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2021 have remained unchanged from the disclosures presented in our 2020 Form 10. Refer to Note 1 of this Form 10-Q for more information about our accounting policies and recent accounting updates.

 

Overview

 

The Company was incorporated in 2000 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s primary purpose is to serve as the holding company for the Bank. On October 2, 2000, pursuant to a Plan of Exchange approved by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company, and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other than that of owning the Bank and has no employees.

 

The Company has one non-bank subsidiary, the GrandSouth Trust, a Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. The GrandSouth Trust is not consolidated in the Company’s financial statements.

 

We provide a full range of financial services through offices located throughout South Carolina. We provide full-service retail and commercial banking products.

 

Our results of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

 

The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this Form 10-Q and in our 2020 Form 10.

 

Discussion of Financial Condition

 

General

 

Total assets increased $73.7 million to $1.2 billion at June 30, 2021, or 6.8%, from December 31, 2020. This increase in assets was primarily due to increases in cash and cash equivalents of $23.4 million, investments available for sale (“AFS”) of $20.9 million, and loans of $30.5 million.

 

Total liabilities increased $70.7 million to $1.1 billion at June 30, 2021, or 7.1%, from December 31, 2020, due primarily to increases in total deposits of $69.9 million, which includes increases in noninterest-bearing deposits of $48.5 million.

 

Total shareholders’ equity increased $3.0 million to $89.5 million, or 3.4%, from December 31, 2020, due to normal retention of earnings, exercise of stock options, and stock-based compensation partially offset by changes in the fair value of AFS investments, payment of dividends, and repurchase of common shares. Tangible book value per common share, a non-GAAP measure, increased $1.02 to $17.05 at June 30, 2021 from $16.03 at December 31, 2020.

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

 

   As Of 
(in thousands, except share data)  June 30, 2021   December 31, 2020 
Book Value (GAAP)  $89,487   $86,525 
Book ValueAttributable to Preferred Shares   (1,298)   (1,298)
Book Value Attributable to Common Shares   88,189    85,227 
Goodwill and intangibles   (737)   (737)
Book Value Attributable to Common Shares (Tangible)  $87,452   $84,490 
Outstanding common shares   5,127,681    5,271,971 
Tangible Book Value Per Common Share  $17.05   $16.03 

 

Cash and Cash Equivalents

 

Total cash and cash equivalents increased $23.4 million to $86.4 million at June 30, 2021 from $63.0 million at December 31, 2020, primarily due to the increase in customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will hold adequate levels of liquid and short-term assets.

 

Investment Securities

 

Our investment securities portfolio is classified as AFS, which is carried at fair value. The following table shows the amortized cost and fair value for our AFS investment portfolio at the dates indicated (in thousands).

 

   June 30, 2021   December 31, 2020 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
U.S. government agencies  $7,467   $7,483   $   $ 
State and municipal obligations   19,931    20,781    16,684    17,820 
Mortgage-backed securities - agency   41,553    41,850    31,056    31,487 
Collateralized mortgage obligations - agency   50,586    51,137    49,441    50,560 
Asset-backed securities   2,732    2,721    6,268    6,235 
Corporate bonds   7,450    7,604    4,500    4,605 
   $129,719   $131,576   $107,949   $110,707 

 

AFS investment securities increased $20.9 million, or 18.9%, to $131.6 million at June 30, 2021 from $110.7 million at December 31, 2020. We continue to look for opportunities to re-deploy funds from investment securities to higher yielding loans.

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Loans

 

The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated (in thousands). Other construction and land loans include residential acquisition and development loans and loans on commercial undeveloped land and one-to-four family improved and unimproved lots. Commercial real estate loans include loans on non-residential owner-occupied and non-owner-occupied real estate, multi-family, and owner-occupied investment property. Commercial and industrial loans include unsecured commercial loans and commercial loans secured by business assets.

 

   June 30,   December 31, 
   2021   2020 
   Amount   Percent   Amount   Percent 
Real estate loans:                    
One-to-four family residential  $117,323    12.9%  $114,119    13.0%
Commercial   405,341    44.5    369,706    42.0 
Home equity loans and lines of credit   19,046    2.1    17,174    2.0 
Residential construction   33,533    3.7    30,989    3.5 
Other construction and land   70,447    7.7    68,611    7.8 
Commercial   230,494    25.3    243,617    27.7 
Consumer   33,817    3.7    35,362    4.0 
Loans receivable, gross  $910,001    100.0%  $879,578    100.0%
Deferred loan fees, net   (909)        (956)     
Unaccreted discount   (261)        (274)     
Unamortized premium   185         197      
                     
Loans receivable, net of deferred fees and costs  $909,016        $878,545      

 

Included in commercial loans are PPP loans totaling $12.5 million and $22.5 million as of June 30, 2021 and December 31, 2020, respectively.

 

Delinquent Loans

 

When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower is referred to the Bank’s Credit Administration staff to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.

 

The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.

 

If a loan is modified in a troubled debt restructure (“TDR”), the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt. For a discussion of TDRs, see the section entitled “Troubled Debt Restructurings” below.

32

 

The following table sets forth certain information with respect to our loan portfolio carrying balances of delinquencies at the dates indicated (in thousands). We had no loans 90 days or more past due that are still accruing interest as of June 30, 2021 or December 31, 2020 that are not 98% guaranteed by the issuing agency.

 

   Delinquent loans 
   30-59 Days   60-89 Days   90 Days and over   Total 
June 30, 2021                    
Commercial  $3   $   $   $3 
Consumer   890    551    2,450    3,891 
Total delinquent loans  $893   $551   $2,450   $3,894 
% of total loans, net   0.10%   0.06%   0.27%   0.43%
                     
December 31, 2020                    
One-to-four family residential  $   $   $15   $15 
Commercial   6        2    8 
Consumer   1,840    727    2,549    5,116 
Total delinquent loans  $1,846   $727   $2,566   $5,139 
% of total loans, net of deferred fees and costs   0.21%   0.08%   0.29%   0.58%

 

Total delinquencies as a percentage of loans have decreased from 0.58% at December 31, 2020 to 0.43% at June 30, 2021. Delinquent loans decreased $1.2 million, or 24.2%, to $3.9 million at June 30, 2021 from $5.1 million at December 31, 2020. We continue to focus on collection efforts and favorable resolutions.

 

Nonperforming Assets

 

Nonperforming loans include all loans past due 90 days and over that are not 98% guaranteed by the issuing agency, certain impaired loans, and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Nonperforming assets include nonperforming loans and other real estate owned (“REO”). The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated (in thousands).

 

   June 30,   December 31, 
   2021   2020 
Nonaccrual loans:          
Real estate loans:          
One-to-four family residential  $22   $39 
Commercial   29    31 
Other construction and land       126 
Commercial   166    324 
Consumer   6    13 
Total nonperforming loans   223    533 
           
REO:          
Commercial real estate   451    513 
Other construction and land   1,394    1,419 
Total foreclosed real estate   1,845    1,932 
Total nonperforming assets  $2,068   $2,465 
           
TDRs still accruing  $1,554   $1,254 
           
Ratios:          
Nonperforming loans to total loans   0.02%   0.06%
Nonperforming assets to total assets   0.18%   0.23%

 

The decrease in nonperforming loans and nonperforming assets is the result of the successful resolution and disposal of nonperforming loans and nonperforming assets by means of restructure, foreclosure, deed in lieu of foreclosure and sales.

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Troubled Debt Restructurings

 

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession that we would not otherwise consider, for other than an insignificant period of time, the related loan is classified as a TDR. We strive to identify borrowers in financial difficulty early so that we may work with them to modify their loans before they reach nonaccrual status. Modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates, periods of interest-only payments, and principal deferments. A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. While unusual, there may be instances of forgiveness of loan principal. We individually evaluate all criticized loans that experience a modification of terms to determine if a TDR has occurred. In accordance with the CARES Act and interagency guidance, the Company implemented loan modification programs in response to the COVID-19 pandemic and elected the accounting policy allowed in the CARES Act and interagency guidance to not apply TDR accounting to these modifications.

 

Classification of Loans

 

The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as “doubtful” or “loss” are charged off immediately (in thousands).

 

   June 30,   December 31, 
   2021   2020 
Classified loans:          
Substandard  $3,385   $3,701 
Doubtful        
Loss        
Total classified loans:   3,385    3,701 
Special mention   9,123    7,777 
Total criticized loans  $12,508   $11,478 
           
Total classified loans as a % of total loans, net of deferred fees and costs   0.37%   0.42%
Total criticized loans as a % of total loans, net of deferred fees and costs   1.38%   1.31%

 

Management continues to dedicate resources to monitoring and resolving classified and criticized loans.

 

Certain industries have been particularly hard-hit by the COVID-19 pandemic, including the travel and hospitality industry, the restaurant industry, and the retail industry. Although we do not have any known credit problems that are not included in the table above, we had $8.7 million of loans to the restaurant and food service industry and $5.0 million of loans to the hotel industry as of June 30, 2021.

 

Allowance for Loan Losses

 

The allowance for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers’ abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.

 

A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan. We individually evaluate loans, or relationships, greater than $200,000 for impairment that are classified as nonaccrual, TDRs, or performing substandard loans. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property less an estimate of selling costs if foreclosure or sale of the property is anticipated. If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment.

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The allowance for homogenous loans consists of a base loss reserve and a qualitative reserve. The loss rates for the base loss reserve, segmented into 8 loan categories, contain average net loss rates ranging from approximately 0.00% to 0.76%.

 

The qualitative reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external factors:

 

Changes in lending and loan review policies;
Experience, ability, and depth of lending management;
Volume and severity of past due, nonaccrual, and classified loans;
Collateral values;
Loan concentrations and loan growth; and
Economic conditions – including unemployment rates, housing prices and sales, and regional economic outlooks.

 

Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends.

 

Our evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of our loans, including the condition of various market segments, considered changes in economic activity and unemployment rates resulting from the COVID-19 pandemic. This evaluation resulted in a reduction in reserve related to the economic conditions qualitative factor as a result of improvement in economic conditions and unemployment rates at both national and regional levels. These factors are subject to further adjustment as economic and other conditions change.

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The following table sets forth activity in our allowance for loan losses at the dates and for the periods indicated (in thousands).

 

   As of and for the 
   Six Months Ended June 30, 
   2021   2020 
Balance at beginning of period  $12,572   $10,287 
Charge-offs:          
Real Estate:          
One-to-four family residential   29     
Commercial        
Home equity loans and lines of credit        
Residential construction        
Other construction and land        
Commercial   204    1,211 
Consumer       26 
Total charge-offs   233    1,237 
           
Recoveries:          
Real Estate:          
One-to-four family residential   19    2 
Commercial        
Home equity loans and lines of credit        
Residential construction        
Other construction and land   17     
Commercial   399    554 
Consumer       24 
Total recoveries   435    580 
Net (recoveries) chargeoffs   (202)   657 
Provision for loan losses   551    1,739 
Balance at end of period  $13,325   $11,369 
           
Ratios:          
Net (recoveries) charge-offs to average loans outstanding   (0.02)%   0.08%
Allowance to nonperforming loans at period end   5,975.34%   1,312.82%
Allowance to total loans at period end   1.47%   1.43%

 

 

Our allowance as a percentage of total loans increased to 1.47% at June 30, 2021 from 1.43% at December 31, 2020, and 1.43% at June 30, 2020, primarily as the result of loan growth.

 

We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. However, in light of the COVID-19 pandemic, there is a risk that loss rates could increase. Our coverage ratio of nonperforming loans increased to 5,975.34% at June 30, 2021 from 2,358.72% at December 31, 2020, and 1,312.82% at June 30, 2020, primarily as the result of the reduced balance of nonperforming loans during the period.

 

Deposits

 

The following table presents deposits by category and percentage of total deposits as of the periods indicated (in thousands).

 

   June 30, 2021   December 31, 2020 
   Balance   Percent   Balance   Percent 
Deposit type:                    
Savings accounts  $13,038    1.3   $10,584    1.1 
Time deposits   238,342    23.4    283,942    30.1 
Money market accounts   440,716    43.4    384,838    40.7 
Interest-bearing demand accounts   72,236    7.1    63,614    6.7 
Noninterest-bearing demand accounts   252,050    24.8    203,502    21.5 
Total deposits  $1,016,382    100.0   $946,480    100.0 

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As indicated in the above table, deposit balances increased approximately $69.9 million, or 7.4%, for the six months ended June 30, 2021 compared December 31, 2020. The increase in total deposits was mainly attributable to the $55.9 million, or 14.5%, increase in money market accounts and $48.5 million, or 23.9%, in noninterest-bearing demand accounts, offset by a $45.6 million, or 16.1%, decline in time deposits.

 

Discussion of Results of Operation

 

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

 

General

 

Net income for the three months ended June 30, 2021 was $4.0 million, compared to $1.6 million for the same period in 2020. The increase in net income for the period was primarily the result of an increase in net interest income of $2.7 million and decreases in the provision for loan losses and noninterest expenses of $0.3 million and $0.1 million, respectively, partially offset by a decrease in noninterest income totaling $0.1 million.

 

Net Interest Income

 

Net interest income increased $2.7 million, or 28.1%, to $12.1 million for the three months ended June 30, 2021, compared to $9.5 million for the same period in 2020. The increase in net interest income was primarily due to a higher volume in loans (both Core Bank and Carbucks) and taxable investments, and decreases in costs on time deposits, partially offset by the decline in yields on our Core Bank loans and taxable investments during the period.

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The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

   For the Three Months Ended June 30, 
   2021   2020 
   Average           Average         
   Outstanding           Outstanding         
   Balance   Interest   Yield/Rate   Balance   Interest   Yield/Rate 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans, Core Bank(1)  $817,045   $8,397    4.12%  $723,827   $7,681    4.27%
Loans, Carbucks(2)   82,789    4,512    21.86%   69,697    3,633    20.97%
Investments - taxable   118,227    358    1.21%   64,428    284    1.77%
Investments - tax exempt (3)   12,648    89    2.81%   6,971    54    3.13%
Federal funds sold and other interest earning deposits   76,508    23    0.12%   51,249    16    0.12%
Other investments, at cost   5,248    31    2.35%   9,664    69    2.86%
                               
Total interest-earning assets   1,112,465    13,410    4.84%   925,836    11,737    5.10%
                               
Noninterest-earning assets   37,716              38,866           
                               
Total assets  $1,150,181             $964,702           
                               
Interest-bearing liabilities:                              
Savings accounts  $12,560   $3    0.10%  $7,952   $2    0.10%
Time deposits   249,266    296    0.48%   348,968    1,620    1.87%
Money market accounts   427,155    462    0.43%   283,705    342    0.48%
Interest bearing transaction accounts   67,423    42    0.25%   27,941    16    0.22%
Total interest bearing deposits   756,404    803    0.43%   668,566    1,980    1.19%
                               
FHLB advances   16,000    36    0.91%   20,000    48    0.97%
Junior subordinated debentures   35,786    432    4.84%   18,103    235    5.23%
Other borrowings               62        0.45%
                               
Total interest-bearing liabilities   808,190    1,271    0.63%   706,730    2,263    1.29%
                               
Noninterest-bearing deposits   248,506              172,575           
                               
Other non interest bearing liabilities   5,780              4,922           
                               
Total liabilities   1,062,476              884,228           
Total equity   87,705              80,474           
                               
Total liabilities and equity  $1,150,181             $964,702           
                               
Tax-equivalent net interest income       $12,139             $9,474      
                               
Net interest-earning assets (4)  $304,275             $219,105           
                               
Average interest-earning assets to interest-bearing   137.65%             131.00%          
                               
Tax-equivalent net interest rate spread (5)             4.21%             3.81%
Tax-equivalent net interest margin (6)             4.38%             4.12%

 

(1) Core Bank is the bank’s primary business to provide traditional deposit and lending products and services to commercial and retail banking clients. 

(2) Carbucks is the bank’s division that provides specialty floor plan lending to small automobile dealers in over 20 states. 

(3) Tax exempt investments are calculated giving effect to a 21% federal tax rate, or $19,000 and $11,000 for the three months ended June 30, 2021 and 2020, respectively. 

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. 

(5) Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(6) Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

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The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to change in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the absolute values of changes due to rate and the changes due to volume.

 

   For the Three Months Ended June 30, 2021 
   Compared to the Three Months Ended June 30, 2020 
   Increase (decrease) due to: 
(in thousands)  Volume   Rate   Total 
Interest-earning assets:               
Loans, Core Bank(1)  $982   $(266)  $716 
Loans, Carbucks(1)   717    162    879 
Investments - taxable   183    (110)   73 
Investments - tax exempt (2)   41    (6)   35 
Federal funds sold and other interest earning   8    (1)   7 
Other investments, at cost   (28)   (10)   (37)
Total interest-earning assets   1,904    (231)   1,673 
                
Interest-bearing liabilities:               
Savings accounts   1        1 
Time deposits   (367)   (957)   (1,324)
Money market accounts   159    (39)   120 
Interest bearing transaction accounts   24    2    26 
FHLB advances   (10)   (2)   (12)
Junior subordinated debentures   216    (19)   197 
Total interest-bearing liabilities   23    (1,015)   (992)
Change in tax-equivalent net interest income  $1,881   $784   $2,665 

 

(1) Non-accrual loans are included in the above analysis.

(2) Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate

 

Net interest income before provision for loan losses increased to $12.1 million for the three months ended June 30, 2021, compared to $9.5 million for the same period in 2020 due to both improvements in volume and favorable movements in rates.

 

The increase in tax-equivalent net interest income of $1.9 million related to volume was primarily the result of higher average loan (both Core Bank and Carbucks) and taxable investment balances which increased $106.3 million and $53.8 million, respectively for the three months ended June 30, 2021 compared to the same period in 2020. The increase in average loan and taxable investment balances was partially offset by increases of $143.4 million in money market balances and $39.5 million in interest bearing transaction accounts. These increases in interest bearing deposits balance were partially offset by a $99.7 million decrease in average time deposits.

 

The increase in tax-equivalent net interest income of $0.8 million related to rate was primarily the result of increased yields on Carbucks loans and decreased costs on time deposits, partially offset by decreased yields on Core Bank loans and taxable investments.

 

Our tax-equivalent net interest margin was 4.38% for the three months ended June 30, 2021, compared to 4.12% for the same period in 2020, an increase of 26 basis points. The increase in net interest margin was primarily attributable to interest rate reductions on our cost of funds partially offset by federal funds rate reductions which impacted Core Bank loans, investments, and interest-earning deposits during 2020.

 

Provision for Loan Losses

 

We recorded a provision for loan losses for the three months ended June 30, 2021 of $0.3 million due to organic loan growth, compared to a $0.7 million provision for loan losses for the same period in 2020 which included certain qualitative adjustments in response to the COVID-19 pandemic. We are experiencing continued stabilization in asset quality, low charge-off amounts, and a continued decline in the historical loss rates used in our allowance for loan losses model. However, in light of the continued COVID-19 pandemic, there is a risk that loss rates could increase.

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Noninterest Income

 

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

 

   Three Months Ended June 30,     
   2021   2020   Change 
Service charges on deposit accounts  $322   $221   $101 
Gain on sale of AFS investment securities       392    (392)
BOLI   85    103    (18)
Net gain on sale of premises and equipment   78    8    70 
Other   283    170    113 
Total noninterest income  $768   $894   $(126)

 

Our noninterest income decreased $0.1 million to $0.8 million in the three months ended June 30, 2021, compared to the same period in 2020 due primarily to the gain on sale of AFS investment securities in 2020 partially offset by increases in service charges on deposit accounts of $0.1 million and other noninterest of $0.1 million which includes excess death benefits of $68 thousand from the redemption of BOLI policies.

 

Noninterest Expense

 

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

 

   Three Months Ended June 30,     
   2021   2020   Change 
Compensation and employee benefits  $4,987   $5,044   $(57)
Net occupancy   584    531    53 
Federal deposit insurance   172    100    72 
Professional and advisory   265    362    (97)
Data processing   494    394    100 
Marketing and advertising   35    28    7 
Net cost of operation of REO   19    258    (239)
Other   847    817    30 
Total noninterest expenses  $7,403   $7,534   $(131)

 

Our noninterest expense decreased $0.1 million to $7.4 million in the three months ended June 30, 2021, compared to the same period in 2020. The increase in data processing expenses of $0.1 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to an increased number of accounts and transactions, was offset by a $0.2 million decrease in net cost of operation of REO due to valuation adjustments for updated appraisals or sales contract amounts in 2020.

 

Income Taxes

 

Income tax expense totaled $1.2 million for the three months ended June 30, 2021, compared to $0.5 million for the same period in 2020. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.4% and 24.5% for the three months ended June 30, 2021 and 2020, respectively.

 

We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.

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Comparison of the Six Months Ended June 30, 2021 and June 30, 2020.

 

General

 

Net income for the six months ended June 30, 2021 was $7.6 million, compared to $3.5 million for the same period in 2020. The increase in net income for the period was primarily the result of an increase in net interest income of $4.1 million and a decrease in the provision for loan losses of $1.2 million, offset by an increase in income tax expense of $1.2 million.

 

Net Interest Income

 

Net interest income increased $4.1 million, or 20.6%, to $24.2 million for the six months ended June 30, 2021, compared to $20.1 million for the same period in 2020. The increase in net interest income was primarily due to a $194.5 million increase in average loans (both Core Bank and Carbucks), a $50.4 million increase in average investments(both taxable and tax exempt), and decreases in costs on our average time deposits and money market accounts, partially offset by the decline in yields on our Core Bank loans and investments during the period and a $103.9 million increase in our average interest-bearing liabilities.

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The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

   For the Six Months Ended June 30, 
   2021   2020 
   Average           Average         
   Outstanding           Outstanding         
   Balance   Interest   Yield/Rate   Balance   Interest   Yield/Rate 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans, Core Bank(1)  $812,361   $16,922    4.20%  $702,313   $15,687    4.49%
Loans, Carbucks(2)   85,029    9,125    21.64%   80,574    8,723    21.77%
Investments - taxable   109,823    627    2.28%   67,371    654    3.88%
Investments - tax exempt (3)   12,692    177    5.59%   4,720    76    6.41%
Federal funds sold and other interest earning deposits   66,897    42    0.13%   35,507    89    0.51%
Other investments, at cost   5,612    64    2.29%   9,643    129    2.70%
                               
Total interest-earning assets   1,092,414    26,957    4.98%   900,128    25,358    5.67%
                               
Noninterest-earning assets   37,258              38,144           
                               
Total assets  $1,129,672             $938,273           
                               
Interest-bearing liabilities:                              
Savings accounts  $11,723   $6    0.10%  $7,377   $4    0.10%
Time deposits   261,826    791    0.61%   360,484    3,637    2.03%
Money market accounts   413,736    915    0.45%   275,452    1,052    0.77%
Interest bearing transaction accounts   65,702    84    0.26%   24,025    21    0.17%
Total interest bearing deposits   752,987    1,796    0.48%   667,338    4,714    1.42%
                               
FHLB advances   16,000    71    0.89%   14,879    81    1.09%
Junior subordinated debentures   35,772    865    4.87%   18,098    486    5.40%
Other borrowings               511    5    2.12%
                               
Total interest-bearing liabilities   804,759    2,732    0.68%   700,826    5,286    1.52%
                               
Noninterest-bearing deposits   231,882              152,942           
                               
Other non interest bearing liabilities   5,845              4,846           
                               
Total liabilities   1,042,486              858,614           
Total equity   87,186              79,659           
                               
Total liabilities and equity  $1,129,672             $938,273           
                               
Tax-equivalent net interest income       $24,225             $20,072      
                               
Net interest-earning assets (4)  $287,655             $199,303           
                               
Average interest-earning assets to interest-bearing liabilities   135.74%             128.44%          
                               
Tax-equivalent net interest rate spread (5)             4.30%             4.15%
Tax-equivalent net interest margin (6)             4.47%             4.48%

 

(1) Core Bank is the bank’s primary business to provide traditional deposit and lending products and services to commercial and retail banking clients.

(2) Carbucks is the bank’s division that provides specialty floor plan lending to small automobile dealers in over 20 states.

(3) Tax exempt investments are calculated giving effect to a 21% federal tax rate, or $37,000 and $16,000 for the six months ended June 30, 2021 and 2020, respectively.

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5) Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(6) Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

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The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to change in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on changes due to rate and the changes due to volume.

 

   For the Six Months Ended June, 2021 
   Compared to the Six Months Ended June 30, 2020 
   Increase (decrease) due to: 
(In thousands)  Volume   Rate   Total 
Interest-earning assets:               
Loans, Core Bank (1)  $2,308   $(1,073)  $1,235 
Loans, Carbucks (1)   458    (56)   402 
Investments - taxable   639    (666)   (27)
Investments - tax exempt (2)   130    (29)   101 
Interest-earning deposits   47    (94)   (47)
Other investments, at cost   (48)   (17)   (65)
Total interest-earning assets   3,534    (1,935)   1,599 
                
Interest-bearing liabilities:               
Savings accounts   2        2 
Time deposits   (800)   (2,046)   (2,846)
Money market accounts   406    (543)   (137)
Interest bearing transaction accounts   49    14    63 
FHLB advances   6    (16)   (10)
Junior subordinated debentures   431    (52)   379 
Other borrowings   (3)   (2)   (5)
Total interest-bearing liabilities   91    (2,645)   (2,554)
Change in tax-equivalent net interest income  $3,443    710    4,153 

 

(1) Non-accrual loans are included in the above analysis.

(2) Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate

 

Net interest income before provision for loan losses increased to $24.2 million for the six months ended June 30, 2021, compared to $20.1 million for the same period in 2020. As indicated in the table above, the increase of $3.4 million in net interest income earned attributable an improvement in volume was combined with a $0.7 million favorable movement in rates.

 

The increase in tax-equivalent net interest income of $3.4 million related to volume was primarily the result of higher average loan (both Core Bank and Carbucks) and investment balances (both taxable and tax exempt) which increased $114.5 million and $50.4 million, respectively, and lower time deposits which decreased $98.7 million for the six months ended June 30, 2021 compared to the same period in 2020. The increase in average loan and investment balances and lower time deposits was partially offset by increases of $138.2 million and $17.8 million in money market and junior subordinated debentures balances.

 

The increase in tax-equivalent net interest income of $0.7 million related to rate was primarily the result of decreased costs on time deposits and money markets accounts. These decreased costs were partially offset by decreased yields on Core Bank loans, taxable investments, and interest-earning deposits.

 

Our tax-equivalent net interest margin was 4.47% for the six months ended June 30, 2021, compared to 4.48% for the same period in 2020. The decrease in net interest margin was primarily attributable to interest rate reductions on our cost of funds, partially offset by the impact of these interest rate reductions on loans, investments, and interest-earning deposits.

 

Provision for Loan Losses

 

We recorded a provision for loan losses for the six months ended June 30, 2021 of $0.6 million due to organic loan growth, compared to a $1.7 million provision for loan losses for the same period in 2020 which included certain qualitative adjustments in response to the COVID-19 pandemic. We are experiencing continued stabilization in asset quality, low charge-off amounts, and a continued decline in the historical loss rates used in our allowance for loan losses model. However, in light of the continued COVID-19 pandemic, there is a risk that loss rates could increase.

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Noninterest Income

 

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

 

   Six Months Ended June 30,     
   2021   2020   Change 
Service charges on deposit accounts  $590   $456   $134 
Gain on sale of AFS investments       392    (392)
BOLI   177    204    (27)
Net gain on sale of premises and equipment   84    8    76 
Other   492    338    154 
Total noninterest income  $1,343   $1,398   $(55)

 

Our noninterest income decreased $0.1 million to $1.3 million in the six months ended June 30, 2021, compared to the same period in 2020 due primarily to gain on sale of AFS securities of $0.4 million in 2020, partially offset by increases in service charges on deposit accounts and third-party loan referral fees and excess death benefits in 2021.

 

Noninterest Expense

 

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

 

   Six Months Ended June 30,     
   2021   2020   Change 
Compensation and employee benefits  $10,061   $10,200   $(139)
Net occupancy   1,148    1,085    63 
Federal deposit insurance   325    231    94 
Professional and advisory   574    634    (60)
Data processing   1,027    844    183 
Marketing and advertising   79    86    (7)
Net cost of operation of REO   129    273    (144)
Other   1,727    1,676    51 
Total noninterest expenses  $15,070   $15,029   $41 

 

Our noninterest expense increased $41 thousand to $15.1 million in the six months ended June 30, 2021, compared to the same period in 2020. Compensation and employee benefits decreased $0.1 million for the six months ended June 30, 2021, as compared to the same period in 2020. The decrease is primarily related to decreased full-time equivalent employees, partially offset by annual raises and increases in employee benefits, incentives and commissions.

 

Data processing expenses increased $0.2 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to an increased number of accounts and transactions.

 

Net cost of operation of REO decreased $0.1 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to valuation adjustments for updated appraisals or sales contract amounts in 2020.

 

Income Taxes

 

Income tax expense totaled $2.4 million for the six months ended June 30, 2021, compared to $1.1 million for the same period in 2020. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.7% and 24.3% for the six months ended June 30, 2021 and 2020.

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We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.

 

Discussion of Segment Results

 

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

 

   As of and for the Three Months Ended June 30, 2021   As of and for the Three Months Ended June 30, 2020 
   Core Bank   Carbucks   Other   Total   Core Bank   Carbucks   Other   Total 
Interest income  $8,449   $4,512   $430   $13,391   $7,861   $3,534   $331   $11,726 
Interest expense   499    340    432    1,271    1,700    327    236    2,263 
Net interest income   7,950    4,172    (2)   12,120    6,161    3,207    95    9,463 
Provision for loan losses   68    241        309    698    (42)       656 
Noninterest income   577    38    153    768    271    127    496    894 
Noninterest expense   4,941    2,440    22    7,403    5,200    2,315    19    7,534 
Net income before taxes   3,518    1,529    129    5,176    534    1,061    572    2,167 
Income tax expense   826    356    31    1,213    132    261    139    532 
Net income  $2,692   $1,173   $98   $3,963   $402   $800   $433   $1,635 
                                         
Total loans, net of deferred fees and costs  $821,535   $87,480   $   $909,016   $736,488   $60,245   $   $796,732 
Total assets  $930,199   $86,833   $146,439   $1,163,471   $815,737   $60,234   $117,500   $993,471 

 

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

 

Core Bank

 

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

 

Core Bank net income increased $2.3 million to $2.7 million for the three months ended June 30, 2021 compared to $0.4 million for the same period in 2020. Net interest income increased $1.8 million to $8.0 million for the three months ended June 30, 2021 from $6.2 million for the same period a year ago primarily due to increased loan volume and reduced funding costs. Provision for loan losses decreased $0.6 million for the three months ended June 30, 2021 compared to 2020 due to certain qualitative adjustments made in the three months ended June 30, 2020 in response to the COVID-19 pandemic, offset by organic growth in the three months ended June 30, 2021. Noninterest income increased $0.3 million for the three months ended June 30, 2021 compared to the same period in 2020 due to increases in service charges on deposit accounts, third-party loan referral fees, and excess death benefits. Noninterest expense decreased $0.3 million to $4.9 million for the 2021 period compared to $5.2 million for the same period in 2020 due to primarily to net cost of operation of REO in 2020 partially offset by increased data processing expense in 2021.

  

Carbucks

 

Carbucks provides specialty floor plan inventory financing for more than 1,500 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 11,000 floored used vehicles with an average price of $6,000 per unit, generally has an average 60-day turnover, and generates approximately $200 in financing fees per vehicle which is included in loan interest income.

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Carbucks net income increased $0.4 million to $1.2 million for the three months ended June 30, 2021 compared to $0.8 million for the same three-month period in 2020. Net interest income increased $1.0 million to $4.2 million for the 2021 period from $3.2 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses increased $0.3 million for the three months ended June 30, 2021 compared to 2020 due to increased inventory levels. Noninterest expense increased $0.1 million to $2.4 million for the 2021 period compared to $2.3 million for the same period in 2020 due primarily to increased vehicle identification related fees as a result of increased inventory.

 

Other

 

Other includes parent company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.

 

Other net income decreased $0.3 million to $0.1 for the three months ended June 30, 2021 compared to net income of $0.4 million for the same period in 2020 primarily due increased interest expense related to the Company’s subordinated debt issuance and gain on sale of AFS securities in 2020, partially offset by increased AFS investment interest .

   

   As of and for the Six Months Ended June 30, 2021   As of and for the Six Months Ended June 30, 2020 
   Core Bank   Carbucks   Other   Total   Core Bank   Carbucks   Other   Total 
Interest income  $17,026   $9,125   $769   $26,920   $15,901   $8,723   $718   $25,342 
Interest expense   1,162    705    865    2,732    3,742    1,058    486    5,286 
Net interest income   15,864    8,420    (96)   24,188    12,159    7,665    232    20,056 
Provision for loan losses   591    (40)       551    1,602    137        1,739 
Noninterest income   1,024    75    244    1,343    528    274    596    1,398 
Noninterest expense   10,158    4,875    37    15,070    9,850    5,148    31    15,029 
Net income before taxes   6,139    3,660    111    9,910    1,235    2,654    797    4,686 
Income tax expense   1,457    869    27    2,353    301    646    192    1,139 
Net income  $4,682   $2,791   $84   $7,557   $934   $2,008   $605   $3,547 
                                         
Total loans, net of deferred fees and costs  $821,535   $87,480   $   $909,016   $736,488   $60,245   $   $796,732 
Total assets  $930,199   $86,833   $146,439   $1,163,471   $815,737   $60,234   $117,500   $993,471 

  

Comparison of the Six Months Ended June 30, 2021 and 2020.

 

Core Bank

 

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

 

Core Bank net income increased $3.7 million to $4.7 million for the six months ended June 30, 2021 compared to $1.0 million for the same period in 2020. Net interest income increased $3.7 million to $15.9 million for the six months ended June 30, 2021 from $12.2 million for the same period a year ago primarily due to increased loan and volume and reduced funding costs. Provision for loan losses decreased $1.0 million for the six months ended June 30, 2021 compared to 2020 due to certain qualitative adjustments made in the three months ended June 30, 2020 in response to the COVID-19 pandemic, offset by organic growth in the six months ended June 30, 2021. Noninterest income increased $0.5 million for the six months ended June 30, 2021 compared to the same period in 2020 due to increases in service charges on deposit accounts, third-party loan referral fees, and excess death benefits. Noninterest expense increased $0.3 million to $10.1 million for the 2021 period compared to $9.8 million for the same period in 2020 due to primarily to increases in federal deposit insurance and data processing expense partially offset by net cost of operation of REO in 2020.

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Carbucks

 

Carbucks provides specialty floor plan inventory financing for more than 1,500 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 11,000 floored used vehicles with an average price of $6,000 per unit, generally has an average 60-day turnover, and generates approximately $200 in financing fees per vehicle which is included in loan interest income.

 

Carbucks net income increased $0.8 million to $2.8 million for the six months ended June 30, 2021 compared to $2.0 million for the same period in 2020. Net interest income increased $0.7 million to $8.4 million for the 2021 period from $7.7 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased $0.2 million for the six months ended June 30, 2021 compared to 2020 due to improvements in certain qualitative factors related to COVID-19 in 2020. Noninterest expense decreased $0.2 million to $4.9 million for the 2021 period compared to $5.1 million for the same period in 2020 due primarily to decreased vehicle identification related fees as a result of reduced inventory in early 2021.

 

Other

 

Other includes parent company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.

 

Other net income decreased $0.5 million to $0.1 million for the six months ended June 30, 2021 compared to net income of $0.6 million for the same period in 2020 primarily due increased interest expense related to the Company’s subordinated debt issuance and gain on sale of AFS securities in 2020.

 

Liquidity and Capital Resources

 

Liquidity and Market Risk. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Atlanta (“FHLB”), and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ALCO, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2021.

 

We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in FHLB and Federal Reserve Bank of Richmond (“FRB”) interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At June 30, 2021, cash and cash equivalents totaled $86.4 million. Included in this total was $50.0 million held at the FRB, $0.7 million held at the FHLB, and $31.9 million held at correspondent banks in interest-earning accounts.

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

 

   Six Months Ended June 30, 
   2021   2020 
Investing activities:          
Purchases of investments  $(37,013)  $(52,684)
Maturities and principal repayments of investments   14,565    6,761 
Sales of investments       18,787 
Net increase in loans   (30,489)   (41,342)
           
Financing activities:          
Net increase in deposits  $69,902   $54,436 
Repurchase of common stock   (3,946)    
Proceeds from FHLB advances       20,000 

  

In addition, because the Company is a separate entity from the Bank, it must provide for its own liquidity. The Company is responsible for payment of dividends declared on its common and preferred stock and interest and principal on any outstanding debt or trust preferred securities. The Company currently has internal capital resources to meet these obligations. While the Company has access to capital, the ultimate sources of its liquidity are dividends from the Bank and tax allocation agreements, which are limited by applicable law and regulations. The Bank paid no dividends to the Company in the three or six months ended June 30, 2021 or 2020.

 

At June 30, 2021, we had $294.8 million in outstanding commitments to extend credit through unused lines of credit and stand-by letters of credit.

 

Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit. Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large portion of our retail certificates of deposit with maturities of one year or less as June 30, 2021.

 

In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows.

 

Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with the FHLB. The following summarizes our borrowing capacity as of June 30, 2021 (in thousands):

 

   Total   Used   Unused 
   Capacity   Capacity   Capacity 
FHLB            
Loan collateral capacity  $340,827           
Pledgeable marketable securities   131,576           
FHLB totals   472,403   $16,000   $456,403 
Fed funds lines   51,000        51,000 
   $523,403   $16,000   $507,403 

 

Capital Resources. Shareholders’ equity increased $3.0 million to $89.5 million at June 30, 2021 compared to $86.5 million at December 31, 2020. This increase was primarily attributable to net income of $7.6 million, stock-based compensation of $0.3 million, and stock options exercised of $0.8 million partially offset by stock repurchases of $3.9 million, after-tax decreases in market value of AFS investment securities of $0.7 million and dividends declared of $1.1 million.

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

 

Repurchased shares will become treasury shares and may be utilized for general corporate purposes.

 

The tables below summarize the capital amounts and ratios of the Bank and the minimum regulatory requirements in accordance with Basel III and the prompt corrective action provisions at June 30, 2021 and December 31, 2020 (dollars in thousands).

 

           To Be Well- 
           Capitalized Under 
       For Capital Adequacy   Prompt Corrective 
   Actual   Purposes (1)   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
As of June 30, 2021:                        
Tier 1 Leverage Capital  $114,087    9.93%  $45,967    ≥4%   $57,459    ≥5% 
Common Equity Tier 1 Capital  $114,087    12.03%  $66,387    ≥7.0%   $61,645    ≥6.5% 
Tier 1 Risk-based Capital  $114,087    12.03%  $80,613    ≥8.5%   $75,871    ≥8% 
Total Risk-based Capital  $125,960    13.28%  $99,580    ≥10.5%   $94,838    ≥10% 
                               
As of December 31, 2020:                              
Tier 1 Leverage Capital  $105,820    10.05%  $36,100    ≥4%   $45,125    ≥5% 
Common Equity Tier 1 Capital  $105,820    11.73%  $63,174    ≥7.0%   $58,662    ≥6.5% 
Tier 1 Risk-based Capital  $105,820    11.73%  $76,712    ≥8.5%   $72,199    ≥8% 
Total Risk-based Capital  $117,117    12.98%  $94,761    ≥10.5%   $90,249    ≥10% 

  

1)Includes capital conservation buffer of 2.50%.

  

The tables below summarize the capital amounts and ratios of the Company and the minimum regulatory requirements in accordance with Basel III at June 30, 2021, and December 31, 2020 (in thousands).

 

           For Capital Adequacy 
   Actual   Purposes (1) 
   Amount   Ratio   Amount   Ratio 
As of June 30, 2021:                
Tier I Leverage Capital  $95,543    8.31%  $45,978    ≥4% 
Common Equity Tier 1 Capital  $87,296    9.20%  $66,442    ≥7.0% 
Tier I Risk-based Capital  $95,543    10.07%  $80,680    ≥8.5% 
Total Risk Based Capital  $134,983    14.22%  $99,664    ≥10.5% 
                     
As of December 31, 2020:                    
Tier I Leverage Capital  $91,876    8.72%  $42,189    ≥4% 
Common Equity Tier 1 Capital  $83,629    9.26%  $63,248    ≥7.0% 
Tier I Risk-based Capital  $91,876    10.17%  $76,801    ≥8.5% 
Total Risk Based Capital  $130,683    14.46%  $94,871    ≥10.5% 

 

1)Includes capital conservation buffer of 2.50%.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

  

One of the most significant forms of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive risk can threaten our earnings, capital, liquidity and solvency. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The board of directors of the Bank has established an ALCO, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Our ALCO monitors and seeks to manage market risk through rate shock analyses, economic value of equity analyses and simulations in order to avoid unacceptable earnings and market value fluctuations due to changes in interest rates.

 

From a funding perspective, we expect to satisfy the majority of our future requirements with retail deposit growth, including checking and savings accounts, money market accounts and certificates of deposit generated within our primary markets. If our funding needs exceed our deposits, we will utilize our excess funding capacity with the FHLB.

 

We have taken the following steps to reduce our interest rate risk:

 

increased our personal and business checking accounts and our money market accounts, which are less rate-sensitive than certificates of deposit and which provide us with a stable, low-cost source of funds;

 

limited the fixed rate period on loans within our portfolio;

 

utilized our securities portfolio for positioning based on projected interest rate environments;

 

priced certificates of deposit to encourage customers to extend to longer terms; and

 

utilized FHLB advances for positioning.

  

Net Interest Income. We analyze the impact of changing rates on our net interest income. Using our balance sheet as of a given date, we analyze the repricing components of individual assets, and, adjusting for changes in interest rates at 100 basis point increments, we analyze the impact on our net interest income. Changes to our net interest income are shown in the following table based on immediate changes to interest rates in 100 basis point increments.

 

The table below reflects the impact of an immediate increase in interest rates in 100 basis point increments on Pretax Net Interest Income (“NII”).

 

    June 30, 2021   December 31, 2020 
 Change in Interest Rates    % Change in Pretax Net    % Change in Pretax Net 
 (basis points)    Interest Income    Interest Income 
 +400    6.4    7.1 
 +300    7.0    7.5 
 +200    5.1    5.4 
 +100    3.1    3.2 
          
 -100    0.4    0.5 

  

The results from the rate shock analysis on NII are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means assets will reprice at a faster pace than liabilities during the short-term horizon. The implications of an asset sensitive balance sheet will differ depending upon the change in market rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, the interest rate on assets will decrease at a faster pace than liabilities. This situation generally results in a decrease in NII and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, the interest rate on assets will increase at a faster pace than liabilities. This situation generally results in an increase in NII and operating income. As indicated in the table above, a 200 basis point increase in rates would result in a 5.1% increase in NII as of June 30, 2021 as compared to a 5.4% increase in NII as of December 31, 2020, suggesting that there is a benefit for the Company to net interest income in rising interest rates. The Company generally seeks to remain neutral to the impact of changes in interest rates by maximizing current earnings while balancing the risk of changes in interest rates.

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Item 4. CONTROLS AND PROCEDURES 

  

Evaluation of Disclosure Controls and Procedures

  

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2021. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of June 30, 2021, the end of the period covered by this Form 10-Q, the Company maintained effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes to the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

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PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

 

In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended June 30, 2021.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors that we have previously disclosed in the “Risk Factors” section in our 2020 Form 10 as filed with the SEC on March 30, 2021.

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

  

Item 3. Defaults Upon Senior Securities

 

None.

  

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

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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 XBRL format.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 12, 2021 Grandsouth Bancorporation
  By: /s/ John B. Garrett
  Name: John B. Garrett
  Title: Chief Financial Officer
  (Authorized Officer)

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