GRANDSOUTH BANCORPORATION - Quarter Report: 2022 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, 2022

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

Commission File Number: 000-31937

GrandSouth Bancorporation

(Exact name of registrant as specified in its charter)


South Carolina	57-1104394
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

381 Halton Road,
Greenville, South Carolina	29607
(Address of principal executive offices)	(Zip Code)

(864) 770-1000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated Filer x

Smaller reporting company x

Emerging growth company o

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On August 1, 2022, 5,222,042 shares of the issuer’s common stock, no par value, were issued and outstanding.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

FORM 10-Q

TABLE OF CONTENTS

		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets – June 30, 2022 and December 31, 2021	3
	Consolidated Statements of Income – Three and Six Months Ended June 30, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2022 and 2021	5
	Consolidated Statements of Changes in Shareholders’ Equity – Three and Six Months Ended June 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2022 and 2021	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
	Signatures	55

Item 1. Financial Statements

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

	(Unaudited)			(Audited)
(in thousands, except share data)	June 30, 2022			December 31, 2021
Assets

Cash and due from banks	$	5,036		$	2,522
Interest-earning deposits		136,041			120,602
Federal funds sold		1,859			977
Cash and cash equivalents		142,936			124,101

Investments - available for sale		116,137			111,962
Investments - held to maturity		5,990			—
Other investments, at cost		2,626			2,984
Loans receivable, net of deferred fees and costs		952,813			933,475
Allowance for loan losses		(14,100	)		(13,723	)
Premises and equipment, net		17,655			17,783
Real estate owned		842			842
Accrued interest receivable		4,746			4,808
Bank owned life insurance		14,935			14,778
Net deferred tax asset		5,342			2,968
Goodwill		737			737
Other assets		3,373			3,007

Total assets	$	1,254,032		$	1,203,722

Liabilities and Shareholders’ Equity

Liabilities:
Deposits:
Noninterest-bearing	$	301,487		$	280,665
Interest-bearing		809,614			778,376
Total deposits		1,111,101			1,059,041
Federal Home Loan Bank advances		5,000			5,000
Junior subordinated notes		35,924			35,864
Accrued interest payable		254			383
Accrued expenses and other liabilities		5,632			6,029
Total liabilities		1,157,911			1,106,317

Commitments and contingencies (Notes 13 and 23)

Shareholders’ Equity:
Preferred stock - Series A - no par value; 287,895 shares authorized, 282,828 shares issued, and outstanding as of June 30, 2022 and December 31, 2021		—			—
Common stock - no par value; 20,000,000 shares authorized; 5,209,542 and 5,168,681 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		—			—
Additional paid in capital		45,424			44,570
Retained earnings		58,026			51,649
Accumulated other comprehensive income		(7,329	)		1,186
Total shareholders’ equity		96,121			97,405
Total liabilities and shareholders’ equity	$	1,254,032		$	1,203,722

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

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)	2022			2021			2022			2021
Interest income:
Interest and fees on loans	$	13,764		$	12,909		$	27,345		$	26,047
Taxable securities		533			358			999			626
Tax-exempt securities		69			70			138			140
Interest-earning deposits		218			23			258			42
Other		14			31			29			65
Total interest income		14,598			13,391			28,769			26,920

Interest expense:
Deposits		758			803			1,445			1,796
Federal Home Loan Bank advances		5			36			10			71
Junior subordinated notes		450			432			883			865
Total interest expense		1,213			1,271			2,338			2,732
Net interest income		13,385			12,120			26,431			24,188
Provision for loan losses		119			309			427			551
Net interest income after provision for loan losses		13,266			11,811			26,004			23,637

Noninterest income:
Service charges on deposit accounts		368			322			702			590
Bank owned life insurance		78			85			157			177
Net gain on sale of premises and equipment		12			78			36			84
Other		179			283			368			492
Total noninterest income		637			768			1,263			1,343

Noninterest expenses:
Compensation and employee benefits		5,679			4,987			11,216			10,061
Net occupancy		571			584			1,157			1,148
Federal deposit insurance		102			172			218			325
Professional and advisory		1,177			265			1,407			574
Data processing		520			494			1,014			1,027
Marketing and advertising		42			35			111			79
Net cost of operation of real estate owned		13			19			37			129
Other		923			847			1,852			1,727
Total noninterest expenses		9,027			7,403			17,012			15,070
Income before taxes		4,876			5,176			10,255			9,910
Income tax expense		1,183			1,213			2,454			2,353

Net income		3,693			3,963			7,801			7,557
Preferred stock dividends		(39	)		(30	)		(77	)		(60	)
Net income applicable to common shareholders	$	3,654		$	3,933		$	7,724		$	7,497

Earnings per common share:
Basic	$	0.67		$	0.73		$	1.42		$	1.38
Diluted	$	0.65		$	0.71		$	1.37		$	1.36

Weighted average common shares outstanding:
Basic		5,201,806			5,134,112			5,192,202			5,167,763
Diluted		5,393,637			5,259,588			5,389,183			5,254,908

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

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2022			2021			2022			2021
Net income	$	3,693		$	3,963		$	7,801		$	7,557
Other comprehensive income (loss):
Change in unrealized holding gains (losses) on securities available for sale		(4,596	)		1,095			(10,888	)		(901	)
Income tax effect related to items of other comprehensive loss		1,001			(238	)		2,373			196
Total other comprehensive income (loss), after tax		(3,595	)		857			(8,515	)		(705	)
Comprehensive income (loss)	$	98		$	4,820		$	(714	)	$	6,852

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

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 (Loss)			Total
Balances at December 31, 2021		5,168,681		$	—		282,828	$	—	$	44,570		$	51,649		$	1,186		$	97,405
Net income		—			—		—		—		—			4,108			—			4,108
Other comprehensive loss, net of tax		—			—		—		—		—			—			(4,920	)		(4,920	)
Stock compensation expense		—			—		—		—		130			—			—			130
Stock options exercised		29,861			—		—		—		418			—			—			418
Common stock dividend ($0.13 per share)		—			—		—		—		—			(672	)		—			(672	)
Preferred stock dividend ($0.1365 per share)		—			—		—		—		—			(38	)		—			(38	)
Balances at March 31, 2022		5,198,542		$	—		282,828	$	—	$	45,118		$	55,047		$	(3,734	)	$	96,431

Net income		—			—		—		—		—			3,693			—			3,693
Other comprehensive loss, net of tax		—			—		—		—		—			—			(3,595	)		(3,595	)
Stock compensation expense		—			—		—		—		144			—			—			144
Stock options exercised		11,000			—		—		—		162			—			—			162
Stock repurchase		—			—		—		—		—			—			—			—
Common stock dividend ($0.13 per share)		—			—		—		—		—			(675	)		—			(675	)
Preferred stock dividend ($0.1365 per share)		—			—		—		—		—			(39	)		—			(39	)
Balances at June 30, 2022		5,209,542		$	—		282,828	$	—	$	45,424		$	58,026		$	(7,329	)	$	96,121

Balances at December 31, 2020		5,271,971		$	—		287,895	$	—	$	46,645		$	37,721		$	2,159		$	86,525
Net income		—			—		—		—		—			3,594			—			3,594
Other comprehensive loss, net of tax		—			—		—		—		—			—			(1,562	)		(1,562	)
Stock compensation expense		—			—		—		—		155			—			—			155
Stock options exercised		36,656			—		—		—		460			—			—			460
Stock repurchase		(135,230	)		—		—		—		(2,392	)		—			—			(2,392	)
Common stock dividend ($0.10 per share)		—			—		—		—		—			(527	)		—			(527	)
Preferred stock dividend ($0.105 per share)		—			—		—		—		—			(30	)		—			(30	)
Balances at March 31, 2021		5,173,397		$	—		287,895	$	—	$	44,868		$	40,758		$	597		$	86,223

Net income		—			—		—		—		—			3,963			—			3,963
Other comprehensive income, net of tax		—			—		—		—		—			—			857			857
Stock compensation expense		—			—		—		—		153			—			—			153
Stock options exercised		29,500			—		—		—		385			—			—			385
Stock repurchase		(75,216	)		—		—		—		(1,554	)		—			—			(1,554	)
Common stock dividend ($0.10 per share)		—			—		—		—		—			(510	)		—			(510	)
Preferred stock dividend ($0.105 per share)		—			—		—		—		—			(30	)		—			(30	)
Balances at June 30, 2021		5,127,681		$	—		287,895	$	—	$	43,852		$	44,181		$	1,454		$	89,487

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

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)


	For the Six Months Ended June 30,
(in thousands)	2022			2021
Cash flows from operating activities:
Net income	$	7,801		$	7,557
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		724			722
Investment amortization, net		415			678
Provision for loan losses		427			551
Provision for real estate owned		—			87
Stock-based compensation expense		274			308
Income on bank owned life insurance, net		(157	)		(177	)
Gain on sale of fixed assets		(36	)		(84	)
Net change in operating assets and liabilities:
Accrued interest receivable		62			209
Other assets		(366	)		(1,788	)
Accrued interest payable		(129	)		(64	)
Other liabilities		(397	)		832
Net cash provided by operating activities		8,618			8,831

Cash flows from investing activities:
Activity for investment securities available for sale:
Purchases		(27,225	)		(37,013	)
Maturities/calls and principal repayments		5,756			14,565
Activity for investment securities held to maturity:
Net increase in loans		(19,602	)		(30,489	)
Redemption of BOLI policies		—			429
Proceeds from sale of fixed assets		49			87
Purchase of fixed assets		(335	)		(726	)
Purchase of other investments, at cost		(142	)		—
Redemption of other investments, at cost		500			2,026
Net cash used in investing activities		(40,999	)		(51,121	)

Cash flows from financing activities:
Net increase in deposits		52,060			69,902
Repurchase of common stock		—			(3,946	)
Cash received upon exercise of stock options		580			845
Dividends paid on common stock		(1,347	)		(1,037	)
Dividends paid on preferred stock		(77	)		(60	)
Net cash provided by financing activities		51,216			65,704
Net change in cash and cash equivalents		18,835			23,414
Cash and cash equivalents, beginning of period		124,101			63,025
Cash and cash equivalents, end of period	$	142,936		$	86,439

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings	$	1,283		$	2,730
Income taxes		3,380			3,072

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

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

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

Pending Acquisition

As described in more detail in Note 11 to the consolidated financial statements, on June 21, 2022, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with First Bancorp, the holding company for First Bank, Southern Pines, North Carolina, pursuant to which the Company will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank. The parties anticipate closing the Merger during the fourth quarter of 2022 or the first quarter of 2023.

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-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022 (the “2021 Form 10-K”). 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 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.

In August 2021, the FASB issued amendments to update SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments were effective upon issuance. These amendments did not have a material effect on the Company’s financial statements.

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

NOTE 2. INVESTMENTS

The amortized cost and estimated fair values of available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities as of June 30, 2022 and December 31, 2021 are summarized as follows (in thousands):


	June 30, 2022
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. government agencies	$	27,451	$	—	$	(1,453	)	$	25,998
State and municipal obligations		25,930		13		(3,468	)		22,475
Mortgage-backed securities - agency		30,245		134		(2,339	)		28,040
Collateralized mortgage obligations - agency		24,124		—		(1,079	)		23,045
Asset-backed securities		2,311		—		(94	)		2,217
Corporate bonds		15,450		12		(1,100	)		14,362
Total	$	125,511	$	159	$	(9,533	)	$	116,137

Held to maturity
U.S. government agencies	$	5,990	$	—	$	(43	)	$	5,947
Total	$	5,990	$	—	$	(43	)	$	5,947


	December 31, 2021
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. government agencies	$	9,479	$	—	$	(40	)	$	9,439
State and municipal obligations	$	26,011	$	959	$	(293	)	$	26,677
Mortgage-backed securities - agency		33,191		316		(89	)		33,418
Collateralized mortgage obligations - agency		26,968		535		(68	)		27,435
Asset-backed securities		2,599		—		(9	)		2,590
Corporate bonds		12,200		360		(157	)		12,403
Total	$	110,448	$	2,170	$	(656	)	$	111,962

There were no HTM securities held as of December 31, 2021.

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, 2022
	Less Than 12 Months				More Than 12 Months				Total
				Unrealized				Unrealized				Unrealized
		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available for sale
U.S. government agencies	$	25,998	$	1,453	$	—	$	—	$	25,998	$	1,453
State and municipal obligations		17,477		2,468		2,806		1,000		20,283		3,468
Mortgage-backed securities - agency		23,034		2,339		—		—		23,034		2,339
Collateralized mortgage obligations - agency		19,812		1,049		3,232		30		23,044		1,079
Asset-backed securities		—		—		2,217		94		2,217		94
Corporate bonds		10,742		1,008		1,609		92		12,351		1,100
Total	$	97,063	$	8,317	$	9,864	$	1,216	$	106,927	$	9,533

Held to maturity
U.S. government agencies	$	5,947	$	43	$	—	$	—	$	5,947	$	43
Total	$	5,947	$	43	$	—	$	—	$	5,947	$	43

	December 31, 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	$	9,439	$	40	$	—	$	—	$	9,439	$	40
State and municipal obligations		8,083		293		—		—		8,083		293
Mortgage-backed securities - agency		18,346		89		—		—		18,346		89
Collateralized mortgage obligations - agency		11,687		68		—		—		11,687		68
Asset-backed securities		—		—		2,590		9		2,590		9
Corporate bonds		4,793		157		—		—		4,793		157
Total	$	52,348	$	647	$	2,590	$	9	$	54,938	$	656

There were no HTM securities held as of December 31, 2021.

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


	June 30, 2022
	Less Than 12 Months		More Than 12 Months		Total
Available for sale
U.S. government agencies		8		—		8
State and municipal obligations		21		3		24
Mortgage-backed securities - agency		16		—		16
Collateralized mortgage obligations - agency		12		2		14
Asset-backed securities		—		2		2
Corporate bonds		26		5		31
Total		83		12		95

Held to maturity
U.S. government agencies		2		—		2
Total		2		—		2

	December 31, 2021
	Less Than 12 Months		More Than 12 Months		Total
U.S. government agencies		3		—		3
State and municipal obligations		8		—		8
Mortgage-backed securities - agency		7		—		7
Collateralized mortgage obligations - agency		5		—		5
Asset-backed securities		—		2		2
Corporate bonds		10		—		10
Total		33		2		35

Management of the Company believes all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

There were no AFS or HTM investment security sales for the three or six months ended June 30, 2022 or 2021.

The amortized cost and estimated fair value of AFS investments in debt securities at June 30, 2022, by contractual maturity, are shown below (in thousands).

	Available for sale				Held to maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Over 1 year through 5 years	$	17,971	$	17,413	$	5,990	$	5,947
Over 5 years through 10 years		31,558		28,658		—		—
Over 10 years		19,302		16,764		—		—
Total securities other than asset-backed and mortgage-backed securities		68,831		62,835		5,990		5,947

Mortgage-backed securities		30,245		28,040		—		—
Collaterized mortgage obligations		24,124		23,045		—		—
Asset-backed securities		2,311		2,217		—		—
Total	$	125,511	$	116,137	$	5,990	$	5,947

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

There was $0.5 million of AFS securities pledged against deposits and borrowings at June 30, 2022 and December 31, 2021. There were no HTM securities pledged against deposits and borrowings at June 30, 2022 and December 31, 2021.

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

Schedule of Other Investment

	June 30,		December 31,
	2022		2021
Federal Home Loan Bank stock	$	790	$	733
Investment in Trust Preferred Securities		247		247
Certificates of deposit		1,004		1,504
Other investments		585		500
Total other investments, at cost	$	2,626	$	2,984

Certificates of deposit totaling $0.3 million and $1.3 million were pledged against customer deposits at June 30, 2022 and December 31, 2021, respectively. Federal Home Loan Bank of Atlanta (“FHLB”) stock is used to collateralize advances with the FHLB.

NOTE 3. LOANS RECEIVABLE

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

Schedule of Loans Receivable

	June 30,			December 31,
	2022			2021
Real estate loans:
One-to four-family residential	$	145,229		$	132,836
Commercial real estate		411,190			423,552
Home equity loans and lines of credit		21,389			21,568
Residential construction		36,443			38,881
Other construction and land		82,223			75,682
Total real estate loans		696,474			692,519
Commercial and industrial		250,584			234,355
Consumer		6,275			7,129
Total commercial and consumer		256,859			241,484
Loans receivable, gross		953,333			934,003
Net deferred loan fees		(520	)		(528	)
Loans receivable, net of deferred fees	$	952,813		$	933,475

Commercial loans includes PPP loans with recorded investments of zero and $1.3 million as of June 30, 2022 and December 31, 2021, respectively.

The Bank had $71.9 million and $46.6 million of loans pledged as collateral to secure funding with the FHLB at June 30, 2022 and December 31, 2021, respectively.

NOTE 4. ALLOWANCE FOR LOAN LOSSES

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


	Three Months Ended June 30, 2022
	One-to-four Family Residential			Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction			Other Construction and Land		Commercial			Consumer			Total
Beginning balance	$	1,343		$	4,570	$	227	$	404		$	857	$	6,375		$	173		$	13,949
Provision		(18	)		18		16		(3	)		21		82			3			119
Charge-offs		—			—		—		—			—		(182	)		(10	)		(192	)
Recoveries		106			—		—		—			—		118			—			224
Ending balance	$	1,431		$	4,588	$	243	$	401		$	878	$	6,393		$	166		$	14,100


	Three Months Ended June 30, 2021
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,270		$	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

	Six Months Ended June 30, 2022
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,363		$	4,688		$	246		$	430		$	824		$	5,985		$	187		$	13,723
Provision		(40	)		(152	)		(3	)		(29	)		35			627			(11	)		427
Charge-offs		—			—			—			—			—			(529	)		(10	)		(539	)
Recoveries		108			52			—			—			19			310			—			489
Ending balance	$	1,431		$	4,588		$	243		$	401		$	878		$	6,393		$	166		$	14,100

	Six Months Ended June 30, 2021
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land			Commercial			Consumer			Total
Beginning balance	$	1,297		$	4,559		$	231		$	389		$	843		$	5,118		$	135		$	12,572
Provision		(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

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, 2022
	One-to-four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	17	$	—	$	—	$	—	$	—	$	—	$	—	$	17
Collectively evaluated for impairment		1,414		4,588		243		401		878		6,393		166		14,083
Ending Balance	$	1,431	$	4,588	$	243	$	401	$	878	$	6,393	$	166	$	14,100

Loans receivable
Individually evaluated for impairment	$	618	$	1,825	$	—	$	—	$	—	$	—	$	—	$	2,443
Collectively evaluated for impairment		144,347		408,666		21,419		36,300		81,973		251,289		6,376		950,370
Loans and Leases Receivable, Gross	$	144,965	$	410,491	$	21,419	$	36,300	$	81,973	$	251,289	$	6,376	$	952,813


	December 31, 2021
	One-to-four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	20	$	—	$	—	$	—	$	—	$	—	$	—	$	20
Collectively evaluated for impairment		1,343		4,688		246		430		824		5,985		187		13,703
Ending Balance	$	1,363	$	4,688	$	246	$	430	$	824	$	5,985	$	187	$	13,723

Loans receivable
Individually evaluated for impairment	$	735	$	2,080	$	—	$	—	$	—	$	28	$	—	$	2,843
Collectively evaluated for impairment		131,870		420,797		21,601		38,750		75,349		235,028		7,237		930,632
Loans and Leases Receivable, Gross	$	132,605	$	422,877	$	21,601	$	38,750	$	75,349	$	235,056	$	7,237	$	933,475

Portfolio Quality Indicators

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

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

	·	Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated.
	·	Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted. This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral.
	·	Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms.
	·	Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable.
	·	Loss (9) – Collectability is unlikely resulting in immediate charge-off.

Description of Segment and Class Risks

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

One-to-four family residential

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

Commercial real estate

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

Home equity and lines of credit

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

Residential construction and other construction and land

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

Commercial

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

Consumer

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, purchased student loans for which there is a 98% guarantee, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since the date of loan origination in excess of principal repayment. Following the sale of $24.6 million of the purchased student loans during the fourth quarter of 2021, as of December 31, 2021, the balance of purchased student loans was $0.7 million, which decreased to zero as of June 30, 2022.

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, 2022
Loan Grade	One-to-Four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
1	$	—	$	—	$	—	$	—	$	—	$	308	$	157	$	465
2		—		232		—		—		—		249		—		481
3		6,345		36,032		3,409		—		3,306		12,102		50		61,244
4		117,287		304,414		15,776		30,096		64,310		103,174		5,062		640,119
5		18,971		65,004		1,942		6,204		14,357		132,274		1,064		239,816
6		1,677		2,881		292		—		—		2,854		16		7,720
7		685		1,928		—		—		—		328		27		2,968
Total	$	144,965	$	410,491	$	21,419	$	36,300	$	81,973	$	251,289	$	6,376	$	952,813

	December 31, 2021
Loan Grade	One-to-Four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
1	$	—	$	—	$	—	$	—	$	—	$	306	$	191	$	497
2		—		245		—		—		—		247		—		492
3		8,719		39,770		3,477		—		3,959		11,071		53		67,049
4		103,893		313,071		16,013		35,707		57,750		102,246		5,461		634,141
5		17,482		60,576		1,715		3,043		13,640		119,455		1,434		217,345
6		1,433		6,729		318		—		—		1,123		44		9,647
7		1,078		2,486		78		—		—		608		54		4,304
Total	$	132,605	$	422,877	$	21,601	$	38,750	$	75,349	$	235,056	$	7,237	$	933,475

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, 2022
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
One-to-four family residential	$	—	$	39	$	—	$	39	$	144,926	$	144,965
Commercial real estate		—		—		—		—		410,491		410,491
Home equity and lines of credit		—		—		—		—		21,419		21,419
Residential construction		—		—		—		—		36,300		36,300
Other construction and land		—		—		—		—		81,973		81,973
Commercial		—		—		54		54		251,235		251,289
Consumer		—		—		—		—		6,376		6,376
Total	$	—	$	39	$	54	$	93	$	952,720	$	952,813

	December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
One-to-four family residential	$	—	$	—	$	50	$	50	$	132,555	$	132,605
Commercial real estate		—		—		—		—		422,877		422,877
Home equity and lines of credit		—		—		—		—		21,601		21,601
Residential construction		—		—		—		—		38,750		38,750
Other construction and land		—		—		—		—		75,349		75,349
Commercial		54		—		—		54		235,002		235,056
Consumer		—		—		590		590		6,647		7,237
Total	$	54	$	—	$	640	$	694	$	932,781	$	933,475

The decrease in past due consumer loans is primarily attributable to the sale of the purchased student loan portfolio, the balance of which, as of December 31, 2021, was $0.7 million, and decreased to zero as of June 30, 2022.

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, 2022 and December 31, 2021 (in thousands).

Schedule of Impaired Loans

	June 30, 2022						December 31, 2021
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a valuation allowance
One-to-four family residential	$	276	$	276	$	—	$	387	$	387	$	—
Commercial real estate		1,825		1,825		—		2,080		2,132		—
Commercial		—		—		—		28		28		—
		2,101		2,101		—		2,495		2,547		—

Loans with a valuation allowance
One-to-four family residential		342		342		17		348		348		20
		342		342		17		348		348		20

Total
One-to-four family residential		618		618		17		735		735		20
Commercial real estate		1,825		1,825		—		2,080		2,132		—
Commercial		—		—		—		28		28		—
	$	2,443	$	2,443	$	17	$	2,843	$	2,895	$	20

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,
	2022				2021
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a valuation allowance
One-to-four family residential	$	277	$	3	$	282	$	3
Commercial real estate		1,857		24		1,542		18
		2,134		27		1,824		21

Loans with a valuation allowance
One-to-four family residential		343		3		356		3
		343		3		356		3

Total
One-to-four family residential		620		6		638		6
Commercial real estate		1,857		24		1,542		18
	$	2,477	$	30	$	2,180	$	24

	Six Months Ended June 30,
	2022				2021
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a valuation allowance
One-to-four family residential	$	278	$	6	$	283	$	6
Commercial real estate		1,885		47		1,562		40
		2,163		53		1,845		46

Loans with a valuation allowance
One-to-four family residential		344		6		357		6
		344		6		357		6

Total
One-to-four family residential		622		12		640		12
Commercial real estate		1,885		47		1,562		40
	$	2,507	$	59	$	2,202	$	52

Nonperforming Loans

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

Schedule of Non-Performaing Loans

	June 30,		December 31,
	2022		2021
One-to-four family residential	$	24	$	107
Commercial real estate		—		767
Commercial		289		473
Consumer		—		2
Nonperforming loans	$	313	$	1,349

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, 2022
	Performing		Nonperforming		Total
	TDRs		TDRs		TDRs
One-to-four family residential	$	563	$	—	$	563
Commercial real estate		911		—		911
Commercial		198		101		299
Consumer		10		—		10
Total	$	1,682	$	101	$	1,783

	December 31, 2021
	Performing		Nonperforming		Total
	TDRs		TDRs		TDRs
One-to-four family residential	$	577	$	—	$	577
Commercial real estate		961		—		961
Commercial		205		110		315
Consumer		37		2		39
Total	$	1,780	$	112	$	1,892

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

There were no new TDR modifications during the three months ended June 30, 2022 and 2021. There were no new TDR modifications during the six months ended June 30, 2022.

	Modification Type	Number of TDR Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Six months ended June 30, 2021
	Interest rate concession	1	$	357	$	357

During the three and six month period ending June 30, 2022 or 2021, no loans previously modified as TDRs within the previous 12 months defaulted.

NOTE 5. DEPOSITS

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

Schedule of Deposits


	As of and for the Six Months Ended June 30,								As of and for the Year Ended December 31
	2022				2021				2021
	Balance		Interest Expense		Balance		Interest Expense		Balance		Interest Expense
Noninterest-bearing demand	$	301,487	$	—	$	252,050	$	—	$	280,665	$	—
Interest-bearing demand		65,557		51		72,236		84		52,479		167
Money Market		543,606		1,086		440,716		915		500,862		1,888
Savings		16,720		8		13,038		6		16,106		13
Time Deposits		183,731		300		238,342		791		208,929		1,192
Total deposits	$	1,111,101	$	1,445	$	1,016,382	$	1,796	$	1,059,041	$	3,260

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, 2022, commitments to extend credit and standby letters of credit totaled $330.1 million. We do not anticipate any material losses as a result of these transactions.

During 2021, the Company entered into an agreement to fund capital contributions of up to $1 million with a financial technology company. As of June 30, 2022, $85 thousand of the commitment has been funded. The Company has accounted for its ownership in the financial technology company as an equity security in accordance with FASB ASC Subtopic 946-323. The funded balance is included in other investments, at cost on the accompanying consolidated balance sheets. The Company has unfunded commitments of $0.9 million related to this agreement as of June 30, 2022.

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

NOTE 7. EARNINGS PER SHARE

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

Schedule of Earning per Share


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Numerator:
Net income	$	3,693		$	3,963		$	7,801		$	7,557
Preferred stock dividends		(39	)		(30	)		(77	)		(60	)
Net income applicable to common equity		3,654			3,933			7,724			7,497

Undistributed earnings allocated to participating securities		(161	)		(190	)		(345	)		(357	)
Net income applicable to common shareholders	$	3,493		$	3,743		$	7,379		$	7,140

Denominator:
Basic - Total weighted-average basic shares outstandings		5,201,806			5,134,112			5,192,202			5,167,763
Stock options		191,831			125,476			196,981			87,145
Diluted - Total weighted-average diluted shares outstanding		5,393,637			5,259,588			5,389,183			5,254,908

Basic income per share	$	0.67		$	0.73		$	1.42		$	1.38
Diluted income per share	$	0.65		$	0.71		$	1.37		$	1.36

The Company excluded 134,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $26.31 from the computation of diluted earnings per share for the three and six months ended June 30, 2022 because of their antidilutive effect.

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.

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						Six Months Ended
	June 30, 2022						June 30, 2022
	AFS Securities			Total			AFS Securities			Total
Balance, beginning of period	$	(3,734	)	$	(3,734	)	$	1,186		$	1,186
Change in net unrealized holding gains on AFS securities		(4,596	)		(4,596	)		(10,888	)		(10,888	)
Income tax effect		1,001			1,001			2,373			2,373
Balance, end of period	$	(7,329	)	$	(7,329	)	$	(7,329	)	$	(7,329	)

	Three Months Ended						Six Months Ended
	June 30, 2021						June 30, 2021
	AFS Securities			Total			AFS Securities			Total
Balance, beginning of period	$	597		$	597		$	2,159		$	2,159
Change in net unrealized holding losses 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

There were no line items in the Consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income in the three or six months ended June 30, 2022 and 2021.

NOTE 9. REPORTABLE SEGMENTS

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

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

Schedule of Reportable Segment


	As of and for the Three Months Ended June 30, 2022
	Core Bank		CarBucks			Other			Total
Interest income	$	8,789	$	5,205		$	604		$	14,598
Interest expense		7		756			450			1,213
Net interest income		8,782		4,449			154			13,385
Provision for loan losses		157		(38	)		—			119
Noninterest income		502		57			78			637
Noninterest expense		5,325		2,786			916			9,027
Net income before taxes		3,802		1,758			(684	)		4,876
Income tax expense		878		425			(120	)		1,183
Net income	$	2,924	$	1,333		$	(564	)	$	3,693

Total assets	$	1,010,324	$	106,307		$	137,401		$	1,254,032


	As of and for the Three Months Ended June 30, 2021
	Core Bank		CarBucks		Other			Total
Interest income	$	8,449	$	4,512	$	430		$	13,391
Interest expense		499		340		432			1,271
Net interest income		7,950		4,172		(2	)		12,120
Provision for loan losses		68		241		—			309
Noninterest income		577		38		153			768
Noninterest expense		4,941		2,440		22			7,403
Net income before taxes		3,518		1,529		129			5,176
Income tax expense		826		356		31			1,213
Net income	$	2,692	$	1,173	$	98		$	3,963

Total assets	$	930,199	$	86,833	$	146,439		$	1,163,471


	As of and for the Six Months Ended June 30, 2022
	Core Bank			CarBucks		Other			Total
Interest income	$	17,118		$	10,511	$	1,140		$	28,769
Interest expense		210			1,245		883			2,338
Net interest income		16,908			9,266		257			26,431
Provision for loan losses		(167	)		594		—			427
Noninterest income		985			121		157			1,263
Noninterest expense		10,615			5,465		932			17,012
Net income before taxes		7,445			3,328		(518	)		10,255
Income tax expense		1,782			796		(124	)		2,454
Net income	$	5,663		$	2,532	$	(394	)	$	7,801

Total assets	$	1,010,324		$	106,307	$	137,401		$	1,254,032


	As of and for the Six Months Ended June 30, 2021
	Core Bank		CarBucks			Other			Total
Interest income	$	17,026	$	9,125		$	769		$	26,920
Interest expense		1,162		705			865			2,732
Net interest income		15,864		8,420			(96	)		24,188
Provision for loan losses		591		(40	)		—			551
Noninterest income		1,024		75			244			1,343
Noninterest expense		10,158		4,875			37			15,070
Net income before taxes		6,139		3,660			111			9,910
Income tax expense		1,457		869			27			2,353
Net income	$	4,682	$	2,791		$	84		$	7,557

Total assets	$	930,199	$	86,833		$	146,439		$	1,163,471

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.

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, 2022
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	25,998	$	—	$	25,998
State and municipal obligations		—		22,475		—		22,475
Mortgage-backed securities - agency		—		28,040		—		28,040
Collateralized mortgage obligations - agency		—		23,045		—		23,045
Asset-backed securities		—		2,217		—		2,217
Corporate bonds		—		—		14,362		14,362
Total recurring assets at fair value	$	—	$	101,775	$	14,362	$	116,137

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	9,439	$	—	$	9,439
State and municipal obligations		—		26,677		—		26,677
Mortgage-backed securities - agency		—		33,418		—		33,418
Collateralized mortgage obligations - agency		—		27,435		—		27,435
Asset-backed securities		—		2,590		—		2,590
Corporate bonds		—		—		12,403		12,403
Total recurring assets at fair value	$	—	$	99,559	$	12,403	$	111,962

There were no financial liabilities measured at fair value on a recurring basis as of June 30, 2022 or December 31, 2021.

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					Six Months Ended
	June 30,					June 30,
	2022			2021		2022			2021

Balance at beginning of period	$	14,829		$	5,093	$	12,403		$	4,605
Corporate bond additions		500			2,450		3,250			2,950
Corporate bond fair value adjustments		(967	)		61		(1,291	)		49
Balance at end of period	$	14,362		$	7,604	$	14,362		$	7,604

Financial Assets Measured on a Nonrecurring Basis

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

Impaired Loans

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

Other Real Estate Owned

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

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


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Real estate owned:
Other construction and land	$	—	$	—	$	842	$	842
Total	$	—	$	—	$	842	$	842

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	106	$	106
Commercial real estate		—		—		630		630
Commercial		—		—		28		28
Real estate owned:
Other construction and land		—		—		842		842
Total	$	—	$	—	$	1,606	$	1,606

There were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2022 or December 31, 2021.

Impaired loans totaling $2.4 million at June 30, 2022 and $2.1 million at December 31, 2021 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, 2022 and December 31, 2021.

June 30,
2022

December 31,
2021

Valuation Technique

Unobservable Input

General Range

Impaired loans

Discounted Appraisals

Collateral discounts

N/A

0% - 15%

Real estate owned

Discounted Appraisals

Collateral discounts and estimated selling cost

10% - 43%

Corporate bonds

Discounted Cash Flows

Recent similar executed financing transactions

0% - 13%

0% - 4%

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, 2022
	Carrying
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	142,936	$	142,936	$	142,936	$	—	$	—
Securities available for sale		116,137		116,137		—		101,775		14,362
Securities held to maturity		5,990		5,947		—		5,947		—
Loans receivable		952,813		936,240		—		—		936,240
Other investments, at cost		2,626		2,626		—		2,626		—
Accrued interest receivable		4,746		4,746		—		4,746		—
BOLI		14,935		14,935		—		14,935		—

Liabilities:
Demand deposits, money market and savings	$	927,370	$	927,370	$	—	$	927,370	$	—
Time deposits		183,731		182,740		—		182,740		—
Federal Home Loan Bank advances		5,000		5,190		—		5,190		—
Junior subordinated debentures		35,924		34,357		—		34,357		—
Accrued interest payable		254		254		—		254		—

			Fair Value Measurements at December 31, 2021
	Carrying
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	124,101	$	124,101	$	124,101	$	—	$	—
Securities available for sale		111,962		111,962		—		99,559		12,403
Loans receivable, net		933,475		923,958		—		—		923,958
Other investments, at cost		2,984		2,984		—		2,984		—
Accrued interest receivable		4,808		4,808		—		4,808		—
BOLI		14,778		14,778		—		14,778		—

Liabilities:
Demand deposits, money market and savings	$	850,112	$	850,112	$	—	$	850,112	$	—
Time deposits		208,929		209,005		—		209,005		—
Federal Home Loan Bank advances		5,000		5,054		—		5,054		—
Junior subordinated debentures		35,864		36,113		—		36,113		—
Accrued interest payable		383		383		—		383		—

NOTE 11. BUSINESS COMBINATIONS

On June 21, 2022, the Company entered into the Merger Agreement with First Bancorp, pursuant to which the Company will merge with and into First Bancorp and the Bank will merge with and into First Bank. As of June 21, 2022, the aggregate merger consideration had a total value of approximately $181.1 million, or $31.43 per share. As of June 30, 2022, the aggregate merger consideration had a total value of approximately $183.1 million, or $31.76 per share.

Upon closing, outstanding and unexercised Company stock options will be converted into stock options to purchase the number of shares of First Bancorp common stock equal to the product of the number of shares of the Company’s common stock underlying the stock option immediately prior to closing and 0.910. The exercise price per share of the resulting First Bancorp stock option will be equal to the exercise price of the converted Company stock option divided by 0.910. Any converted stock option being less than a whole share of First Bancorp stock being cancelled for a cash payment.

The Merger Agreement was unanimously approved by the boards of directors of each of the Company and First Bancorp. The closing of the Merger is subject to the approval of the Company’s shareholders, obtaining the requisite regulatory approvals and other customary closing conditions. The parties anticipate closing the Merger during the fourth quarter of 2022 or the first quarter of 2023.

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety be reference to the Merger Agreement, which is incorporated as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

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, 2022. 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 18, 2022, the Company’s Board of Directors approved regular cash dividends of $0.13 per common share and $0.1365 per Series A preferred share payable on August 18, 2022 to shareholders of record on August 4, 2022.

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1932 (the “Exchange Act”), which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “continue,” “seek,” “could,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to (i) our goals, intentions, business plans, objectives, strategies, projected growth, anticipated future financial performance (including underlying assumptions), and management’s long-term performance goals, (ii) the anticipated effects or consequences of various transactions or events on our results of operations and financial condition, including, but not limited to, statements regarding our outlook and expectations with respect to our planned Merger with First Bancorp, the strategic and financial benefits of the Merger, including the expected impact of the Merger on the combined company’s scale, deposit franchise, growth and future financial performance, and the timing of the closing of the Merger.

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

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

Changes in the interest rate environment which could reduce anticipated or actual margins;

Restrictions or conditions imposed by our regulators on our operations;

Increases in competitive pressure in the banking and financial services industries;

Changes in access to funding or increased regulatory requirements with regard to funding;

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 political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the presidential administration and Democratic control of Congress;

Changes in economic conditions in the United States and the strength of the local economies in which we conduct our operations, including, but not limited to, due to the continuing negative impacts and disruptions resulting from the outbreak of COVID-19 on the economies and communities we serve, which may have an adverse impact on our business, operations and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally;

Changes occurring in business conditions and inflation;

Increased cybersecurity risk, including potential business disruptions or financial losses;

Changes in technology;

The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;

Changes in monetary and tax policies;

Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;

The rate of delinquencies and amounts of loans charged-off;

The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

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

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

Changes in accounting policies, practices or guidelines;

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

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

the failure to obtain necessary regulatory approvals with respect to the Merger when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

the failure of either company to satisfy any of the other closing conditions to the Merger on a timely basis or at all;

the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Merger Agreement;

the possibility that the anticipated benefits of the Merger, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where we and First Bancorp do business, or as a result of other unexpected factors or events;

the impact of purchase accounting with respect to the Merger, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

diversion of management’s attention from ongoing business operations and opportunities;

potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Merger;

the outcome of any legal proceedings that may be instituted against us and/or First Bancorp in connection with the Merger;

the integration of our business and operations with First Bancorp, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to our existing business or the existing business of First Bancorp;

business disruptions following the Merger;

other factors that may affect future results of the combined company including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; changes in general economic conditions, including due to the COVID-19 pandemic; the impact, extent and timing of technological changes; capital management activities; and other actions of the banking regulators and legislative and regulatory actions and reforms; and

descriptions of assumptions underlying or relating to any of the foregoing.

For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022, (“2021 Form 10-K”).

Non-GAAP Measures

This Form 10-Q includes financial information determined by a method other than in accordance with generally accepted accounting principles (“GAAP”). This financial information includes the operating performance measure “Tangible book value per common share, outstanding”.

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

Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2022 have remained unchanged from the disclosures presented in our 2021 Form 10-K. Refer to Note 1 in the notes to the consolidated financial statements included under Item 1 -“Financial Statements” of this Form 10-Q for more information about recent accounting updates.

Overview

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

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

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

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

The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this Form 10-Q and in our 2021 Form 10-K.

Discussion of Financial Condition

General

Total assets increased $50.3 million to $1.3 billion at June 30, 2022, or 4.18%, from December 31, 2021. This increase in assets was primarily due to increases in cash and cash equivalents of $18.8 million and loans of $19.3 million.

Total liabilities increased $51.6 million to $1.2 billion at June 30, 2022, or 4.66%, from December 31, 2021, due primarily to increases in total deposits of $52.1 million, which includes increases in interest-bearing deposits of $31.2 million.

Total shareholders’ equity decreased $1.3 million to $96.1 million, or 4.18%, from December 31, 2021, due changes in the fair value of AFS investments and payment of dividends partially offset by normal retention of earnings, exercise of stock options, and stock-based compensation expense. Book Value per common share decreased $0.39 to $18.22 at June 30, 2022 from $18.61 at December 31, 2021. Tangible book value per common share, a non-GAAP measure, also decreased $0.39 to $18.08 at June 30, 2022 from $18.47 at December 31, 2021.

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

	As Of
(in thousands, except share data)	June 30, 2022			December 31, 2021
Book Value (GAAP)	$	96,121		$	97,405
Book Value Attributable to Preferred Shares		(1,204	)		(1,204	)
Book Value Attributable to Common Shares		94,917			96,201
Outstanding common shares		5,209,542			5,168,681
Book Value Per Common Share	$	18.22		$	18.61

Book Value (GAAP)	$	96,121		$	97,405
Book Value Attributable to Preferred Shares		(1,204	)		(1,204	)
Book Value Attributable to Common Shares		94,917			96,201
Goodwill and intangibles		(737	)		(737	)
Book Value Attributable to Common Shares (Tangible)	$	94,180		$	95,464
Outstanding common shares		5,209,542			5,168,681
Tangible Book Value Per Common Share	$	18.08		$	18.47

Cash and Cash Equivalents

Total cash and cash equivalents increased $18.8 million to $142.9 million at June 30, 2022 from $124.1 million at December 31, 2021, primarily due to the increase in customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will continue to hold adequate levels of liquid and short-term assets.

Investment Securities

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

	June 30, 2022				December 31, 2021
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
U.S. government agencies	$	27,451	$	25,998	$	9,479	$	9,439
State and municipal obligations		25,930		22,475		26,011		26,677
Mortgage-backed securities - agency		30,245		28,040		33,191		33,418
Collateralized mortgage obligations - agency		24,124		23,045		26,968		27,435
Asset-backed securities		2,311		2,217		2,599		2,590
Corporate bonds		15,450		14,362		12,200		12,403
	$	125,511	$	116,137	$	110,448	$	111,962

Held to maturity
U.S. government agencies	$	5,990	$	5,947	$	—	$	—
	$	5,990	$	5,947	$	—	$	—

AFS investment securities increased $4.2 million, or 3.73%, to $116.1 million at June 30, 2022 from $112.0 million at December 31, 2021. During the six months ended June 30, 2022, $3.3 million of AFS corporate bonds and $18.0 of AFS U.S. government agencies were purchased. HTM investment securities increased $6.0 million, to $6.0 million at June 30, 2022 from zero million at December 31, 2021. During the six months ended June 30, 2022, $6.0 million of HTM U.S. government agencies were purchased. We continue to look for opportunities to re-deploy funds from investment securities to higher yielding loans.

The composition and maturities of the AFS and HTM investment securities portfolios at June 30, 2022 are summarized in the following table (in thousands). Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The composition and maturity distribution of the securities portfolio is subject to change depending on rate sensitivity, capital, and liquidity needs. The weighted average yield for the month ended June 30, 2022 was calculated using net income (interest accrual plus or minus accretion/amortization) divided by ending book value.

	Less than one year					More than one year through five years					More than five years through ten years					More than ten years					Total securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
Available for sale
U.S. government agencies	$	—		0.00	%	$	17,971		1.48	%	$	9,480		1.31	%	$	—		0.00	%	$	27,451		1.42	%
State and municipal obligations		—		0.00	%		—		0.00	%		7,378		2.05	%		18,552		2.35	%		25,930		2.26	%
Mortgage-backed securities - agency		—		0.00	%		147		3.82	%		7,887		1.57	%		22,211		1.45	%		30,245		1.49	%
Collateralized mortgage obligations - agency		—		0.00	%		—		0.00	%		12,214		2.20	%		11,910		-0.11	%		24,124		1.06	%
Asset-backed securities		—		0.00	%		—		0.00	%		513		1.33	%		1,798		1.67	%		2,311		1.60	%
Corporate bonds		—		0.00	%		—		0.00	%		14,700		4.03	%		750		4.92	%		15,450		4.07	%
Total securities available-for-sale	$	—		0.00	%	$	18,118		1.50	%	$	52,172		2.43	%	$	55,221		1.47	%	$	125,511		1.87	%

Held to maturity
U.S. government agencies	$	—		0.00	%	$	5,990		2.57	%	$	—		0.00	%	$	—		0.00	%	$	5,990		2.57	%
Total securities held to maturity	$	—		0.00	%	$	5,990		2.57	%	$	—		0.00	%	$	—		0.00	%	$	5,990		2.57	%

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, 2022					December 31, 2021
	Balance			Percent		Balance			Percent
Real estate mortgage loans:
One-to four-family residential	$	145,229			15.23	$	132,836			14.22
Commercial real estate		411,190			43.13		423,552			45.36
Home equity loans and lines of credit		21,389			2.24		21,568			2.31
Residential construction		36,443			3.82		38,881			4.16
Other construction and land		82,223			8.62		75,682			8.10
Commercial		250,584			26.30		234,355			25.09
Consumer		6,275			0.66		7,129			0.76
Loans receivable, gross		953,333			100.00		934,003			100.00
Net deferred loan costs (fees)		(520	)				(528	)

Loans receivable, net of deferred fees	$	952,813				$	933,475

Commercial real estate loan balances contracted during year to date primarily due to significant paydowns of existing loans.

Included in commercial loans are PPP loans totaling zero and $1.3 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, all PPP loans were paid off or forgiven by the SBA.

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.

The following table sets forth certain information with respect to our loan portfolio carrying balances of delinquencies at the dates indicated (in thousands). We had no loans 90 days or more past due and still accruing interest as of June 30, 2022. We had no loans 90 days or more past due that are still accruing interest as of December 31, 2021 that are not 98% guaranteed by the issuing agency. The decrease in past due consumer loans is primarily attributable to the sale of the purchased student loan portfolio, the balance of which, as of December 31, 2021, was $0.7 million, and decreased to zero as of June 30, 2022.

	Delinquent loans
	30-59 Days			60-89 Days			90 Days and Over			Total
June 30, 2022
One-to-four family residential	$	—		$	39		$	—		$	39
Commercial		—			—			54			54
Total delinquent loans	$	—		$	39		$	54		$	93
Percent of total loans, net		0.00	%		0.00	%		0.01	%		0.01	%

December 31, 2021
One-to-four family residential	$	—		$	—		$	50		$	50
Commercial		54			—			—			54
Consumer		—			—			590			590
Total	$	54		$	—		$	640		$	694
Percent of total loans, net		0.01	%		0.00	%		0.07	%		0.07	%

Total delinquencies as a percentage of loans decreased from 0.07% at December 31, 2021 to 0.01% at June 30, 2022. Delinquent loans decreased $0.6 million, or 86.60%, to $0.1 million at June 30, 2022 from $0.7 million at December 31, 2021. We continue to focus on collection efforts and favorable resolutions.

Nonperforming Assets

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

	June 30,			December 31,
	2022			2021
Nonaccrual loans:
Real estate loans:
One-to-four family residential	$	24		$	107
Commercial		—			767
Commercial		289			473
Consumer		—			2
Total nonperforming loans		313			1,349

REO:
Other construction and land		842			842
Total foreclosed real estate		842			842
Total nonperforming assets	$	1,155		$	2,191

TDRs still accruing	$	1,682		$	1,780

Ratios:
Nonperforming loans to total loans		0.03	%		0.14	%
Nonperforming assets to total assets		0.09	%		0.18	%

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

Troubled Debt Restructurings

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

All TDRs over $200,000 are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and the ultimate collectability of all amounts contractually due is not in doubt. We may also remove a loan from TDR and impaired status if the loan is subsequently restructured and at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted to the borrower.

Classification of Loans

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

	June 30,			December 31,
	2022			2021
Classified loans:
Substandard	$	2,968		$	4,304
Doubtful		—			—
Loss		—			—
Total classified loans:		2,968			4,304
Special mention		7,720			9,647
Total criticized loans	$	10,688		$	13,951

Total classified loans as a % of total loans, net		0.31	%		0.46	%
Total criticized loans as a % of total loans, net		1.12	%		1.49	%

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

Allowance for Loan Losses

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

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

The allowance for homogenous loans consists of a base loss reserve and a qualitative reserve. The loss rates for the base loss reserve, segmented into seven loan categories, contain average net loss rates ranging from approximately 0.00% to 0.54%.

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

Changes in lending and loan review policies;

Economic conditions – including unemployment rates, federal macroeconomic data, housing prices and sales, and regional economic outlooks;

Changes in the nature and volume of the portfolio and in the terms of the loans;

Experience, ability, and depth of lending management;

Volume and severity of past due, nonaccrual, and classified loans;

Changes in the quality of the institution’s loan review system;

Collateral values;

Loan concentrations and loan growth; and

The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses.

Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends. There is no certainty that our allowance for loan losses will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast.

The following table summarizes the net charge-off detail as a percentage of average loans by loan composition for the periods indicated (in thousands).

	Six Months Ended June 30,
	2022						2021
	Amount			Percent			Amount			Percent
Real Estate:
One-to-four family residential	$	(108	)		-0.06	%	$	10			0.01	%
Commercial real estate		(52	)		-0.01	%		—			0.00	%
Home equity loans and lines of credit		—			0.00	%		—			0.00	%
Residential construction		—			0.00	%		—			0.00	%
Other construction and land		(19	)		-0.02	%		(17	)		-0.02	%
Commercial		219			0.07	%		(195	)		-0.06	%
Consumer		10			0.11	%		—			0.00	%
Total	$	50					$	(202	)

Ratios:
Net charge-offs to average loans outstanding					0.01	%					(0.02	)%
Allowance to nonperforming loans at period end (1)					4504.79	%					987.77	%
Allowance to total loans at period end					1.48	%					1.47	%

(1)	At June 30, 2022, total nonperforming loans were comprised of nonaccrual loans and loans 90 days past due and still accruing.

Our allowance as a percentage of total loans increased to 1.48% at June 30, 2022 from 1.47% at December 31, 2021, and 1.47% at June 30, 2021, primarily as the result of loan growth in our CarBucks segment, which maintains a higher reserve allocation.

We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. Our coverage ratio of nonperforming loans increased to 4,504.79% at June 30, 2022 from 1,017.27% at December 31, 2021 primarily as the result of the decreased balance of nonperforming loans during the period.

Deposits

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

	June 30, 2022				December 31, 2021
	Balance		Percent		Balance		Percent
Noninterest-bearing demand	$	301,487		27.1	$	280,665		26.5
Interest-bearing demand		65,557		5.9		52,479		5.0
Money Market		543,606		49.0		500,862		47.3
Savings		16,720		1.5		16,106		1.5
Time Deposits		183,731		16.5		208,929		19.7
	$	1,111,101		100.0	$	1,059,041		100.0

At June 30, 2022 and December 31, 2021, we estimate that we have approximately $443.8 million and $393.8 million, respectively, in uninsured deposits including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, these amounts are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by the FDIC for the Call Report.

As indicated in the above table, deposit balances increased approximately $52.1 million, or 4.92%, for the six months ended June 30, 2022 compared to December 31, 2021. The increase in total deposits was mainly attributable to the $42.7 million, or 8.53%, increase in money market accounts, the $13.1 million, or 24.92%, increase in interest-bearing demand accounts and $20.8 million, or 7.42%, increase in noninterest-bearing demand accounts, partially offset by a $25.2 million, or 12.06%, decline in time deposits.

Discussion of Results of Operation

Comparison of the Three Months Ended June 30, 2022 and June 30, 2021.

General

Net income for the three months ended June 30, 2022 was $3.7 million, compared to $4.0 million for the same period in 2021. The decrease in net income for the period was primarily the result of increases in noninterest expenses totaling $1.6 million, partially offset by an increase in net interest income of $1.3 million. Of noninterest expenses during second quarter, $0.9 million is related to the Company’s pending merger with First Bancorp.

Net Interest Income

Net interest income increased $1.3 million, or 10.44%, to $13.4 million for the three months ended June 30, 2022, compared to $12.1 million for the same period in 2021. The increase in net interest income was primarily due to a higher volume in CarBucks loans and yields on taxable investments and federal funds sold and other interest earning deposits. This was partially offset by the decline in yields on our CarBucks loans and the increase in money market account interest rates.

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

	For the Three Months Ended June 30,
	2022								2021
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, Core Bank⁽¹⁾	$	825,660		$	8,559		4.16	%	$	817,045		$	8,397		4.12	%
Loans, Carbucks⁽²⁾		108,963			5,205		19.16	%		82,789			4,512		21.86	%
Investments - taxable		112,285			533		1.90	%		118,227			358		1.21	%
Investments - tax exempt⁽³⁾		11,141			88		3.17	%		12,648			89		2.82	%
Federal funds sold and other interest earning deposits		155,351			218		0.56	%		76,508			23		0.12	%
Other investments, at cost		2,618			14		2.14	%		5,248			31		2.37	%

Total interest-earning assets		1,216,018			14,617		4.82	%		1,112,465			13,410		4.84	%

Noninterest-earning assets		36,844								37,716

Total assets	$	1,252,862							$	1,150,181

Interest-bearing liabilities:
Savings accounts	$	16,999		$	4		0.09	%	$	12,560		$	3		0.10	%
Time deposits		192,422			144		0.30	%		249,266			296		0.48	%
Money market accounts		545,251			583		0.43	%		427,155			462		0.43	%
Interest bearing transaction accounts		58,774			27		0.18	%		67,423			42		0.25	%
Total interest bearing deposits		813,446			758		0.37	%		756,404			803		0.43	%

FHLB advances		5,000			5		0.40	%		16,000			36		0.91	%
Junior subordinated debentures		35,906			450		5.03	%		35,786			432		4.84	%
Other borrowings		1			—		0.00	%		—			—		0.00	%

Total interest-bearing liabilities		854,353			1,213		0.57	%		808,190			1,271		0.63	%

Noninterest-bearing deposits		295,671								248,506

Other non interest bearing liabilities		5,499								5,780

Total liabilities		1,155,523								1,062,476
Total equity		97,339								87,705

Total liabilities and equity	$	1,252,862							$	1,150,181

Tax-equivalent net interest income				$	13,404							$	12,139

Net interest-earning assets⁽⁴⁾	$	361,665							$	304,275

Average interest-earning assets to interest-bearing liabilities		142.33	%							137.65	%

Tax-equivalent net interest rate spread⁽⁵⁾							4.25	%							4.21	%
Tax-equivalent net interest margin⁽⁶⁾							4.42	%							4.38	%

⁽¹⁾	Core Bank is the bank’s primary business to provide traditional deposit and lending products and services to commercial and retail banking clients.
⁽²⁾	Carbucks is the bank’s division that provides specialty floor plan lending to small automobile dealers in over 20 states.
⁽³⁾	Tax exempt investments are calculated giving effect to a 21% federal tax rate, or $19,000 and $19,000 for the three months ended June 30, 2022 and 2021, respectively.
⁽⁴⁾	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
⁽⁵⁾	Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
⁽⁶⁾	Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

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

	For the Three Months Ended June 30, 2022
	Compared to the Three Months Ended June 30, 2021
	Increase (decrease) due to:
(In thousands)	Volume			Rate			Total
Interest-earning assets:
Loans - Core Bank (1)	$	89		$	73		$	162
Loans - CarBucks (1)		1,300			(607	)		693
Investment - taxable		(19	)		194			175
Investments - tax exempt (2)		(11	)		10			(1	)
Interest-earning deposits		43			152			195
Other investments, at cost		(14	)		(3	)		(17	)
Total interest-earning assets		1,388			(181	)		1,207

Interest-bearing liabilities:
Savings accounts		1			—			1
Time deposits		(58	)		(94	)		(152	)
Money market accounts		126			(5	)		121
Interest bearing transaction accounts		(5	)		(10	)		(15	)
FHLB advances		(17	)		(14	)		(31	)
Junior subordinated debentures		1			17			18
Other borrowings		1			—			1
Total interest-bearing liabilities		49			(106	)		(57	)
Change in tax-equivalent net interest income	$	1,339		$	(75	)	$	1,264

(1)	Nonaccrual loans are included in the above analysis.
(2)	Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate.

Net interest income before provision for loan losses increased to $13.4 million for the three months ended June 30, 2022, compared to $12.1 million for the same period in 2021, due to improvements in volume, partially offset by unfavorable movements in interest rates.

The increase in tax-equivalent net interest income of $1.3 million related to volume was primarily the result of higher average loan (both Core Bank and CarBucks) which increased $34.8 million, and a $56.8 million decrease in average time deposits for the three months ended June 30, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of $118.1 million in money market balances.

The decrease in tax-equivalent net interest income of $0.1 million related to rate was primarily the result of decreased yields on CarBucks loans, partially offset by increased yields on investments and interest-earning deposits and decreased costs on time deposits.

Our tax-equivalent net interest margin was 4.42% for the three months ended June 30, 2022, compared to 4.38% for the same period in 2021, an increase of four basis points. The increase in net interest margin was primarily attributable to higher average loan balances combined with interest rate reductions on our cost of funds partially offset by reduced yields on our CarBucks loans.

Provision for Loan Losses

We recorded a provision for loan losses for the three months ended June 30, 2022 of $0.1 million due to organic loan growth. This compares to a $0.3 million provision for loan losses in for the same period in 2021. We are experiencing continued stabilization in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions, labor shortages and the associated impact on monetary policy, there is a risk that loss rates could increase.

Noninterest Income

The following table summarizes the components of noninterest income and the corresponding changes between the three months ended June 30, 2022 and 2021 (in thousands):

	Three Months Ended June 30,
	2022		2021		Change
Service charges on deposit accounts	$	368	$	322	$	46
Bank owned life insurance		78		85		(7	)
Net gain on sale of premises and equipment		12		78		(66	)
Other noninterest income		179		283		(104	)
Total noninterest income	$	637	$	768	$	(131	)

Our noninterest income decreased $0.1 million to $0.6 million in the three months ended June 30, 2022, compared to the same period in 2021 due primarily to decreases in net gain on sale of premises and equipment and other noninterest income, partially offset by an increase in service charges on deposit accounts.

Noninterest Expense

The following table summarizes the components of noninterest expense and the corresponding change between the three months ended June 30, 2022 and 2021 (in thousands):

	Three Months Ended June 30,
	2022		2021		Change
Compensation and employee benefits	$	5,679	$	4,987	$	692
Net occupancy		571		584		(13	)
Federal deposit insurance		102		172		(70	)
Professional and advisory		1,177		265		912
Data processing		520		494		26
Marketing and advertising		42		35		7
Net cost of operation of real estate owned		13		19		(6	)
Other noninterest expense		923		847		76
Total noninterest expenses	$	9,027	$	7,403	$	1,624

Our noninterest expense increased $1.6 million to $9.0 million in the three months ended June 30, 2022, compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of $0.7 million and increases in professional and advisory expenses of $0.9 million. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined with annual raises and increases in employee benefits, incentives and commissions. The increase in professional and advisory expenses is primarily related to our pending merger with First Bancorp.

Income Taxes

Income tax expense totaled $1.2 million for the three months ended June 30, 2022, compared to $1.2 million for the same period in 2021. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 24.3% and 23.4% for the three months ended June 30, 2022 and 2021, respectively.

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

Discussion of Segment Results for the Quarter

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

Comparison of the Three Months Ended June 30, 2022 and 2021.

	As of and for the Three Months Ended June 30, 2022
	Core Bank		CarBucks			Other			Total
Interest income	$	8,789	$	5,205		$	604		$	14,598
Interest expense		7		756			450			1,213
Net interest income		8,782		4,449			154			13,385
Provision for loan losses		157		(38	)		—			119
Noninterest income		502		57			78			637
Noninterest expense		5,325		2,786			916			9,027
Net income before taxes		3,802		1,758			(684	)		4,876
Income tax expense		878		425			(120	)		1,183
Net income	$	2,924	$	1,333		$	(564	)	$	3,693

Total assets	$	1,010,324	$	106,307		$	137,401		$	1,254,032

	As of and for the Three Months Ended June 30, 2021
	Core Bank		CarBucks		Other			Total
Interest income	$	8,449	$	4,512	$	430		$	13,391
Interest expense		499		340		432			1,271
Net interest income		7,950		4,172		(2	)		12,120
Provision for loan losses		68		241		—			309
Noninterest income		577		38		153			768
Noninterest expense		4,941		2,440		22			7,403
Net income before taxes		3,518		1,529		129			5,176
Income tax expense		826		356		31			1,213
Net income	$	2,692	$	1,173	$	98		$	3,963

Total assets	$	930,199	$	86,833	$	146,439		$	1,163,471

Core Bank

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

Core Bank net income increased $0.2 million to $2.9 million for the three months ended June 30, 2022 compared to $2.7 million for the same period in 2021. Net interest income increased $0.8 million to $8.8 million for the three months ended June 30, 2022 from $8.0 million for the same period a year ago primarily due to increased yields on taxable investments and federal funds sold and other interest earning deposits, partially offset by an increase in interest rates on money market accounts. Provision for loan losses increased $0.1 million for the three months ended June 30, 2022 compared to 2021 due to higher organic loan growth, partially offset by lower net charge off activity during the second quarter of 2022 as compared to the second quarter of 2021. Noninterest expense increased $0.4 million to $5.3 million for the 2022 period compared to $4.9 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense.

CarBucks

CarBucks provides specialty floor plan inventory financing for more than 1,600 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using our Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of $8,700 per unit, generally has an average 65-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.

CarBucks net income increased $0.2 million to $1.3 million for the three months ended June 30, 2022 compared to $1.2 million for the same three-month period in 2021. Net interest income increased $0.3 million to $4.4 million for the 2022 period from $4.2 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses decreased $0.3 million for the three months ended June 30, 2022 compared to 2021 due to a contraction in the loan balance during the second quarter of 2022 as opposed to an increase in the second quarter of 2021 and lower qualitative adjustments. This was partially offset by higher net charges during the second quarter of 2022 as compared to the same period in 2021. Noninterest expense increased $0.3 million to $2.8 million for the 2022 period compared to $2.4 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense in 2022.

Other

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

Other net income decreased $0.7 million to a loss of $0.6 million for the three months ended June 30, 2022 compared to the same period in 2021 primarily due to an increase in noninterest expense, specifically professional and advisory services expenses, partially offset by increased interest income related to our taxable investments. Of professional and advisory expenses during the quarter, $0.9 million were related to our pending merger with First Bancorp.

Comparison of the Six Months Ended June 30, 2022 and June 30, 2021.

General

Net income for the six months ended June 30, 2022 was $7.8 million, compared to $7.6 million for the same period in 2021. The increase in net income for the period was primarily the result of increases in net interest income of $2.2 million, partially offset by an increase in noninterest expenses totaling $1.9 million, $0.9 million of which is included in professional and advisory expenses and is related to our pending merger with First Bancorp.

Net Interest Income

Net interest income increased $2.2 million, or 9.27%, to $26.4 million for the six months ended June 30, 2022, compared to $24.2 million for the same period in 2021. The increase in net interest income was primarily due to a higher volume in loans (both Core Bank and CarBucks), yields on taxable investments and federal funds sold and other interest earning deposits, and decreases in the balance of and costs on time deposits. This was partially offset by the decline in yields on loans (both Core Bank and CarBucks) and balances of money market accounts.

	For the Six Months Ended June 30,
	2022								2021
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, Core Bank⁽¹⁾	$	830,082		$	16,834		4.09	%	$	812,361		$	16,922		4.20	%
Loans, Carbucks⁽²⁾		108,607			10,511		19.52	%		85,029			9,125		21.64	%
Investments - taxable		110,106			999		1.83	%		109,823			627		1.15	%
Investments - tax exempt⁽³⁾		11,689			175		3.02	%		12,692			177		2.81	%
Federal funds sold and other interest earning deposits		135,427			258		0.38	%		66,897			42		0.13	%
Other investments, at cost		2,755			29		2.12	%		5,612			64		2.30	%

Total interest-earning assets		1,198,666			28,806		4.85	%		1,092,414			26,957		4.98	%

Noninterest-earning assets		35,576								37,258

Total assets	$	1,234,242							$	1,129,672

Interest-bearing liabilities:
Savings accounts	$	16,628		$	8		0.10	%	$	11,723		$	6		0.10	%
Time deposits		197,739			300		0.31	%		261,826			791		0.61	%
Money market accounts		532,439			1,087		0.41	%		413,736			915		0.45	%
Interest bearing transaction accounts		55,690			50		0.18	%		65,702			84		0.26	%
Total interest bearing deposits		802,496			1,445		0.36	%		752,987			1,796		0.48	%

FHLB advances		5,000			10		0.40	%		16,000			71		0.89	%
Junior subordinated debentures		35,891			883		4.96	%		35,772			865		4.88	%
Other borrowings		1			—		0.00	%		—			—		0.00	%

Total interest-bearing liabilities		843,388			2,338		0.56	%		804,759			2,732		0.68	%

Noninterest-bearing deposits		286,997								231,882

Other non interest bearing liabilities		5,853								5,845

Total liabilities		1,136,238								1,042,486
Total equity		98,004								87,186

Total liabilities and equity	$	1,234,242							$	1,129,672

Tax-equivalent net interest income				$	26,468							$	24,225

Net interest-earning assets⁽⁴⁾	$	355,278							$	287,655

Average interest-earning assets to interest-bearing liabilities		142.13	%							135.74	%

Tax-equivalent net interest rate spread⁽⁵⁾							4.29	%							4.30	%
Tax-equivalent net interest margin⁽⁶⁾							4.45	%							4.47	%

⁽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 $37,000 for the six months ended June 30, 2022 and 2021, respectively.
⁽⁴⁾	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
⁽⁵⁾	Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
⁽⁶⁾	Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

	For the Six Months Ended June 30, 2022
	Compared to the Six Months Ended June 30, 2021
	Increase (decrease) due to:
(In thousands)	Volume			Rate			Total
Interest-earning assets:
Loans - Core Bank (1)	$	365		$	(453	)	$	(88	)
Loans - CarBucks (1)		2,347			(961	)		1,386
Investment - taxable		2			370			372
Investments - tax exempt (2)		(15	)		13			(2	)
Interest-earning deposits		72			144			216
Other investments, at cost		(30	)		(5	)		(35	)
Total interest-earning assets		2,741			(892	)		1,849

Interest-bearing liabilities:
Savings accounts		2		$	—			2
Time deposits		(162	)		(329	)		(491	)
Money market accounts		246			(75	)		171
Interest bearing transaction accounts		(12	)		(22	)		(34	)
FHLB advances		(34	)		(27	)		(61	)
Junior subordinated debentures		3			16			19
Other borrowings		1			—			1
Total interest-bearing liabilities		44			(437	)		(393	)
Change in tax-equivalent net interest income	$	2,697		$	(455	)	$	2,242

(1)	Nonaccrual loans are included in the above analysis.
(2)	Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate.

Net interest income before provision for loan losses increased to $26.4 million for the six months ended June 30, 2022, compared to $24.2 million for the same period in 2021, due to improvements in volume, partially offset by unfavorable movements in interest rates.

The increase in tax-equivalent net interest income of $2.7 million related to volume was primarily the result of higher average loan (both Core Bank and CarBucks) which increased $41.3 million, and a $64.1 million decrease in average time deposits for the six months ended June 30, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of $118.7 million in money market balances.

The decrease in tax-equivalent net interest income of $0.5 million related to rate was primarily the result of decreased yields on Core Bank and CarBucks loans and decreased costs on time deposits, partially offset by increased yields on investments and interest-earning deposits.

Our tax-equivalent net interest margin was 4.45% for the six months ended June 30, 2022, compared to 4.47% for the same period in 2021, a decrease of two basis points. The decrease in net interest margin was primarily attributable to reduced yields on our Core Bank and CarBucks loans, partially offset by higher average loan balances combined with interest rate reductions on our cost of funds.

Provision for Loan Losses

We recorded a provision for loan losses for the six months ended June 30, 2022 of $0.4 million due to organic loan growth and certain qualitative adjustments. This compares to a $0.6 million provision for loan losses in for the same period in 2021. We are experiencing continued stabilization in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions, labor shortages and the associated impact on monetary policy, there is a risk that loss rates could increase.

Noninterest Income

The following table summarizes the components of noninterest income and the corresponding changes between the six months ended June 30, 2022 and 2021 (in thousands):

	Six Months Ended June 30,
	2022		2021		Change
Service charges on deposit accounts	$	702	$	590	$	112
Bank owned life insurance		157		177		(20	)
Net gain on sale of premises and equipment		36		84		(48	)
Other noninterest income		368		492		(124	)
Total noninterest income	$	1,263	$	1,343	$	(80	)

Our noninterest income decreased less than $0.1 million to $1.3 million in the six months ended June 30, 2022, compared to the same period in 2021, due primarily to decreases in net gain on sale of premises and equipment and other noninterest income, partially offset by an increase in service charges on deposit accounts.

Noninterest Expense

The following table summarizes the components of noninterest expense and the corresponding change between the six months ended June 30, 2022 and 2021 (in thousands):

	Six Months Ended June 30,
	2022		2021		Change
Compensation and employee benefits	$	11,216	$	10,061	$	1,155
Net occupancy		1,157		1,148		9
Federal deposit insurance		218		325		(107	)
Professional and advisory		1,407		574		833
Data processing		1,014		1,027		(13	)
Marketing and advertising		111		79		32
Net cost of operation of real estate owned		37		129		(92	)
Other noninterest expense		1,852		1,727		125
Total noninterest expenses	$	17,012	$	15,070	$	1,942

Our noninterest expense increased $1.9 million to $17.0 million in the six months ended June 30, 2022, compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of $1.2 million and increases in professional and advisory expenses of $0.8 million. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined with annual raises and increases in employee benefits, incentives and commissions. The increase in professional and advisory expenses is primarily related to our pending merger with First Bancorp.

Income Taxes

Income tax expense totaled $2.5 million for the six months ended June 30, 2022, compared to $2.4 million for the same period in 2021. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.9% and 23.7% for the six months ended June 30, 2022 and 2021, respectively.

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

Discussion of Segment Results Year-to Date through June 30, 2022

Comparison of the Six Months Ended June 30, 2022 and 2021.

	As of and for the Six Months Ended June 30, 2022
	Core Bank			CarBucks			Other			Total
Interest income	$	17,118		$	10,511		$	1,140		$	28,769
Interest expense		210			1,245			883			2,338
Net interest income		16,908			9,266			257			26,431
Provision for loan losses		(167	)		594			—			427
Noninterest income		985			121			157			1,263
Noninterest expense		10,615			5,465			932			17,012
Net income before taxes		7,445			3,328			(518	)		10,255
Income tax expense		1,782			796			(124	)		2,454
Net income	$	5,663		$	2,532		$	(394	)	$	7,801

Total assets	$	1,010,324		$	106,307		$	137,401		$	1,254,032

	As of and for the Six Months Ended June 30, 2021
	Core Bank			CarBucks			Other			Total
Interest income	$	17,026		$	9,125		$	769		$	26,920
Interest expense		1,162			705			865			2,732
Net interest income		15,864			8,420			(96	)		24,188
Provision for loan losses		591			(40	)		—			551
Noninterest income		1,024			75			244			1,343
Noninterest expense		10,158			4,875			37			15,070
Net income before taxes		6,139			3,660			111			9,910
Income tax expense		1,457			869			27			2,353
Net income	$	4,682		$	2,791		$	84		$	7,557

Total assets	$	930,199		$	86,833		$	146,439		$	1,163,471

Core Bank

Core Bank net income increased $0.3 million to $5.0 million for the six months ended June 30, 2022 compared to $4.7 million for the same period in 2021. Net interest income increased $1.0 million to $16.9 million for the six months ended June 30, 2022 from $15.9 million for the same period a year ago primarily due to increased loan volume and reduced funding costs, partially offset by a reduction in loan yield. Provision for loan losses decreased $0.8 million for the six months ended June 30, 2022 compared to 2021 due to lower loan growth and qualitative adjustments to the allowance for loan losses along with higher net recovery activity in the six months ended June 30, 2022 as compared to the same period in 2021. Noninterest expense increased $1.4 million to $11.5 million for the 2022 period compared to $10.2 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense and professional and advisory expenses in 2022. Of professional and advisory expenses through June 30, 2022, $0.9 million were related to our pending merger with First Bancorp.

CarBucks

CarBucks provides specialty floor plan inventory financing for more than 1,600 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using our Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of $8,300 per unit, generally has an average 66-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.

CarBucks net income decreased $0.3 million to $2.5 million for the six months ended June 30, 2022 compared to $2.8 million for the same six-month period in 2021. Net interest income increased $0.8 million to $9.3 million for the six months ended June 30, 2022 compared to $8.4 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses increased $0.6 million for the six months ended June 30, 2022 compared to the same period in 2021 due to increased net charge offs and higher loan balance, partially offset by lower qualitative adjustments. Noninterest expense increased $0.6 million to $5.5 million for the six months ended June 30, 2022 compared to $4.9 million for the same period in 2021 due primarily to increases in compensation and employee benefits expense and other noninterest expense in 2022.

Other

Other net income increased $0.2 million to $0.3 million for the six months ended June 30, 2022 compared to the same period in 2021 primarily due to increased interest income related to our taxable investments and federal funds sold and other interest earning deposits.

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, as of June 30, 2022, we have enough sources of liquidity to satisfy our liquidity needs for the next twelve months and thereafter.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally 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, 2022, cash and cash equivalents totaled $142.9 million. Included in this total was $100.0 million held at the FRB, $1.2 million held at the FHLB, and $34.9 million held at correspondent banks in interest-earning accounts.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources and uses of liquidity during the six months ended June 30, 2022 and 2021 (in thousands):

	Six Months Ended June 30,
	2022			2021
Investing activities:
Purchases of investments	$	(27,225	)	$	(37,013	)
Maturities and principal repayments of investments		5,756			14,565
Net increase in loans		(19,602	)		(30,489	)

Financing activities:
Net increase in deposits	$	52,060		$	69,902
Repurchase of common stock		—			(3,946	)

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 six months ended June 30, 2022 or 2021.

At June 30, 2022, we had $330.1 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, 2022.

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

Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with the FHLB. The following summarizes our borrowing capacity as of June 30, 2022 (in thousands):

	Total		Used		Unused
	Capacity		Capacity		Capacity
FHLB
Loan collateral capacity	$	370,879
Pledgeable marketable securities		121,627
FHLB totals		492,506	$	5,000	$	487,506
Fed funds lines		49,000		—		49,000
	$	541,506	$	5,000	$	536,506

Capital Resources. Shareholders’ equity decreased $1.3 million to $96.1 million at June 30, 2022 compared to $97.4 million at December 31, 2021. This decrease was primarily attributable to after-tax decreases in market value of AFS investment securities of $8.5 million and dividends declared of $1.4 million offset by net income of $7.8 million, stock-based compensation of $0.3 million, and stock options exercised of $0.6 million

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, 2022 and December 31, 2021 (dollars in thousands).

	Actual					For Capital Adequacy Purposes (1)				To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio		Amount		Ratio
As of June 30, 2022:
Tier 1 Leverage Capital	$	131,873		10.53	%	$	50,072		>4.0%	$	62,589		>5.0%
Common Equity Tier 1 Capital	$	131,873		12.75	%	$	72,406		>7.0%	$	67,234		>6.5%
Tier 1 Risk-based Capital	$	131,873		12.75	%	$	87,921		>8.5%	$	82,749		>8.0%
Total Risk-based Capital	$	144,817		14.00	%	$	108,609		>10.5%	$	103,437		>10.0%

As of December 31, 2021:
Tier 1 Leverage Capital	$	123,344		10.21	%	$	48,317		>4.0%	$	60,396		>5.0%
Common Equity Tier 1 Capital	$	123,344		12.24	%	$	70,517		>7.0%	$	65,480		>6.5%
Tier 1 Risk-based Capital	$	123,344		12.24	%	$	85,628		>8.5%	$	80,591		>8.0%
Total Risk-based Capital	$	135,951		13.50	%	$	105,776		>10.5%	$	100,739		>10.0%

(1)

Includes capital conservation buffer of 2.50%.

The tables below summarize the capital amounts and ratios of the Company and the minimum⁽¹⁾regulatory requirements in accordance with Basel III at June 30, 2022, and December 31, 2021 (in thousands).

	Actual					For Capital Adequacy Purposes (2)
	Amount		Ratio			Amount		Ratio
As of June 30, 2022:
Tier I Leverage Capital	$	110,960		8.86	%	$	50,085		>4.0%
Common Equity Tier 1 Capital	$	102,713		9.92	%	$	72,470		>7.0%
Tier I Risk-based Capital	$	110,960		10.72	%	$	88,000		>8.5%
Total Risk Based Capital	$	151,592		14.64	%	$	108,706		>10.5%

As of December 31, 2021:
Tier I Leverage Capital	$	103,730		8.59	%	$	48,327		>4.0%
Common Equity Tier 1 Capital	$	95,482		9.47	%	$	70,574		>7.0%
Tier I Risk-based Capital	$	103,730		10.29	%	$	85,696		>8.5%
Total Risk Based Capital	$	143,963		14.28	%	$	105,860		>10.5%

(1)

Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the FRB (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

(2)

Includes capital conservation buffer of 2.50%.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2022. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of June 30, 2022, 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, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended June 30, 2022.

As previously described, on June 21, 2022, the Company and First Bancorp entered into the Merger Agreement, pursuant to which, upon satisfaction of the conditions set forth in the Merger Agreement, the Company will merge with and into First Bancorp, with First Bancorp being the surviving corporation and the Company ceasing to be a separate entity.

Item 1A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 21, 2022, as well as cautionary statements contained in this report, including those under the caption “Cautionary Note Regarding Forward-Looking Statements,” risks and matters described elsewhere in this report and in our other filings with the SEC.

We are providing these additional risk factors to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Risks Related to our Proposed Merger with First Bancorp

Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

Before the Merger may be completed, the Company, the Bank, First Bancorp, and First Bank must obtain approvals from the Board of Governors of the Federal Reserve System and the North Carolina Commissioner of Banks. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals, the regulators consider a variety of factors, including the regulatory standing of each party. An adverse development in any party’s regulatory standing or other factors could result in an inability to obtain or a delay in receiving their approval. These regulators may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Such conditions or changes could delay or prevent completion of the Merger or impose additional costs on or limit the revenues of the combined company following the Merger, any of which might have an adverse effect on the combined company following the Merger.

Combining the companies may be more difficult, costly, or time-consuming than expected.

The Company and First Bancorp have operated and, until the completion of the Merger, will continue to operate independently. The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on First Bancorp’s ability to successfully combine and integrate the businesses of First Bancorp and the Company in a manner that permits growth opportunities and does not materially disrupt the existing customer relations or result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures, and policies that could adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Merger. The loss of key employees could adversely affect the Company’s ability to successfully conduct its business, which could have an adverse effect on the Company’s financial results and the value of the Company’s common stock. If First Bancorp experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause First Bancorp and/or the Company to lose customers or cause customers to remove their accounts from First Bancorp and/or the Company and move their business to competing financial institutions. Integration efforts will also divert management attention and resources. These integration matters could have an adverse effect on each of First Bancorp and the Company during this transition period and for an undetermined period after completion of the Merger on the combined company.

Additionally, the combined company may not be able to successfully achieve the level of cost savings, revenue enhancements and other synergies that it expects, and may not be able to capitalize upon the existing customer relationships of each party to the extent anticipated, or it may take longer, or be more difficult or expensive than expected, to achieve these goals. These circumstances could have an adverse effect on the combined company’s business, results of operation and stock price.

The Merger is subject to certain closing conditions that, if not satisfied or waived, will result in the Merger not being completed. Termination of the Merger Agreement could negatively impact the Company.

The Merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approval of the Merger Agreement by the Company’s shareholders. If any condition to the Merger is not satisfied or waived, to the extent permitted by law, the Merger will not be completed. In addition, either First Bancorp or the Company may terminate the Merger Agreement under certain circumstances even if the Merger Agreement is approved by the Company’s shareholders, including but not limited to, if the Merger has not been completed on or before March 31, 2023.

If the Merger Agreement is terminated, there may be various consequences. For example, the Company’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed. These circumstances could have an adverse effect on the Company’s results of operation.

The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending.

The Merger Agreement restricts the Company from operating its business other than in the ordinary course and prohibits the Company from taking specified actions without First Bancorp’s consent until the Merger occurs. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger. In addition, uncertainty about the effect of the Merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is completed and may impair the Company’s ability to attract, retain and grow its customer base until the Merger is complete. Retention of certain employees by the Company may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company, the Company’s business could be harmed. Further, the uncertainty caused by the pending Merger could cause the Company’s customers and business associates to seek to change their existing business relationships with the Company. These circumstances could have an adverse effect on the combined company’s business, results of operation and stock price.

The market value of the merger consideration that the Company’s shareholders will receive as a result of the Merger may fluctuate.

If the Merger is completed, each share of the Company’s common stock will be converted into the right to receive 0.91 shares of First Bancorp common stock, and cash in lieu of any fractional shares. The market value of the merger consideration may vary from the closing price of First Bancorp common stock on the date the Merger was announced, on the date that the proxy statement/prospectus is mailed to the Company’s shareholders, on the date of the meeting of the Company’s shareholders, on the date the Merger is consummated, and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the respective businesses, operations and prospects, and the regulatory standing of First Bancorp and the Company. Many of these factors are beyond the control of the Company. Any change in the market price of First Bancorp common stock prior to completion of the Merger will affect the amount of and the market value of the merger consideration that the Company’s shareholders will receive upon completion of the Merger. Accordingly, at the time of the shareholders meeting, the Company’s shareholders will not know or be able to calculate the amount or the market value of the merger consideration they would receive upon completion of the Merger.

Further, the results of operations of the combined company following the Merger and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of First Bancorp and the Company.

If the Merger is not completed, the Company will have incurred substantial expenses without realizing the expected benefits of the Merger.

The Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the Merger.

The Merger Agreement limits the Company’s ability to pursue an alternative acquisition proposal and could require the Company to pay a termination fee of $7.2 million under certain circumstances relating to alternative acquisition proposals.

The Merger Agreement prohibits the Company from soliciting, initiating, encouraging, inducing, or knowingly facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by the Company to First Bancorp of a termination fee in the amount of $7.2 million in the event that the Company or First Bancorp terminates the Merger Agreement for certain specified reasons related to an alternative acquisition proposal. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition.

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.

Item 6. Exhibits

(d) Exhibits. See Exhibit Index Below

Exhibit No.	Description
2.1	Agreement and Plan of Merger and Reorganization, dated June 21, 2022, by and between GrandSouth Bancorporation and First Bancorp (incorporated by reference to Exhibit 2.1 to GrandSouth Bancorporation’s Current Report on Form 8-K filed with the SEC on June 21, 2022).
31.1	Certification of Chief Executive Officer of GrandSouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
31.2	Certification of Chief Financial Officer of GrandSouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
32.1	Certifications of the Chief Executive Officer and the Chief Financial Officer of GrandSouth Bancorporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial Statements filed in Inline XBRL format.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

SIGNATURES

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

Date: August 15, 2022	GrandSouth Bancorporation
	By:	/s/ John B. Garrett
	Name: John B. Garrett
	Title: Chief Financial Officer
	(Authorized Officer)