TC Bancshares, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐	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 333-254212

TC Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Georgia	86-2650449
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

131 South Dawson Street, Thomasville, Georgia	31792
(Address of Principal Executive Office)	(Zip Code)

(229) 226-3221

(Issuer’s Telephone Number including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	TCBC	The Nasdaq Stock Market LLC

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 past 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 ☐ No ☒

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Securities Exchange Act:


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☒

		Emerging growth company	☒

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 Securities Exchange Act. ☐

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

As of November 10, 2021, 4,898,350 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

TC BANCSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47

Signature Pages		48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

September 30, 2021 and December 31, 2020


ASSETS
	September 30, 2021			December 31, 2020
	(Unaudited)
Cash and due from banks	$	38,242,675		$	31,876,399
Federal funds sold		10,000,000			10,000,000
Cash and cash equivalents		48,242,675			41,876,399
Certificates of deposit with other banks		3,451,000			5,652,000
Investment securities available-for-sale		43,279,593			15,916,866
Other investments		190,700			714,000
Mortgage loans held for sale		4,194,237			2,944,962
Loans, net		265,966,065			262,355,967
Premises and equipment, net		3,294,791			3,443,509
Other real estate owned		1,378,200			81,000
Bank owned life insurance		11,095,745			10,883,428
Accrued interest receivable and other assets		5,605,976			6,059,002
Total Assets	$	386,698,982		$	349,927,133

LIABILITIES AND EQUITY
Deposits:
Demand	$	34,650,851		$	28,768,659
Interest-bearing demand		148,298,769			146,479,513
Savings		34,739,725			32,275,374
Certificates of deposit		76,618,108			86,576,281
Total deposits		294,307,453			294,099,827
Federal Home Loan Bank advances		—			9,515,477
Accrued interest payable and other liabilities		7,237,445			6,453,541
Total liabilities		301,544,898			310,068,845
Commitments		—			—
Equity:
Common stock, $.01 par value, 20,000,000 and -0- shares authorized as of September, 30, 2021 and December 31, 2020, respectively; 4,898,350 and -0- shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		48,984			—
Additional paid in capital		47,411,073			—
Retained earnings		43,906,191			41,973,211
Accumulated other comprehensive loss		(2,293,484	)		(2,114,923	)
Unearned ESOP shares 391,868 and -0- shares unallocated at September 30, 2021 and December 31, 2020, respectively		(3,918,680	)		—
Total equity		85,154,084			39,858,288
Total Liabilities and Equity	$	386,698,982		$	349,927,133

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest and Dividend Income:
Interest and fees on loans	$	3,210,252	$	3,162,034	$	9,422,541	$	9,245,231
Interest and dividends on taxable investment securities		116,441		86,973		265,987		341,952
Interest on deposits with other banks and federal fund sold		46,639		61,305		157,621		234,653
Total interest and dividend income		3,373,332		3,310,312		9,846,149		9,821,836
Interest Expense:
Interest on deposits		231,728		494,979		794,208		1,883,207
Interest on borrowings		1,383		33,818		39,924		85,270
Total interest expense		233,111		528,797		834,132		1,968,477
Net interest income		3,140,221		2,781,515		9,012,017		7,853,359
Provision for Allowance for Loan Losses		106,836		179,363		123,183		779,758
Net interest income after provision for allowance for loan losses		3,033,385		2,602,152		8,888,834		7,073,601
Other Income:
Service charges on deposits accounts		151,853		108,445		421,001		369,391
Gain on sale of mortgage loans		537,115		412,367		1,638,612		744,323
Bank owned life insurance income		70,610		74,363		212,317		226,336
Other		17,232		50		24,607		18,386
Total other income		776,810		595,225		2,296,537		1,358,436
Other Expense:
Salaries and employee benefits		1,892,823		1,814,460		5,562,710		4,720,967
Occupancy and equipment		216,816		188,731		616,766		548,495
Other real estate owned, net of operations, loss (gain) on sales and write-downs		2,449		4,817		3,649		(1,037	)
Data processing conversion costs		—		67,225		503		121,725
Other		916,808		690,231		2,484,906		2,031,200
Total other expense		3,028,896		2,765,464		8,668,534		7,421,350
Income Before Income Taxes		781,299		431,913		2,516,837		1,010,687
Income Tax Expense		183,455		98,121		583,857		217,787
Net Income	$	597,844	$	333,792	$	1,932,980	$	792,900

Earnings per share:
Basic	$	0.12	N/A		$	0.12	N/A
Diluted	$	0.12	N/A		$	0.12	N/A

Weighted Average Shares Outstanding:
Basic		3,844,941	N/A			3,844,941	N/A
Diluted		3,844,941	N/A			3,844,941	N/A

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net Income	$	597,844		$	333,792		$	1,932,980		$	792,900
Other Comprehensive (Loss) Income,
Net of Income Taxes:
Unrealized (losses) gains on securities available-for-sale:
Holding (losses) gains arising during the period, net of taxes of ($33,126), ($10,853), ($68,704), and $129,163, respectively		(89,562	)		(38,250	)		(178,561	)		340,313
Total other comprehensive (loss) income		(89,562	)		(38,250	)		(178,561	)		340,313
Comprehensive Income	$	508,282		$	295,542		$	1,754,419		$	1,133,213

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

three and nine months ended September 30, 2021 and 2020

UNAUDITED


	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Unearned - ESOP Shares			Total
Balance, December 31, 2019	$	—	$	—	$	41,665,557	$	(1,877,095	)	$	—		$	39,788,462
Net income for the three months ended March 31, 2020 (unaudited)		—		—		257,346		—			—			257,346
Other comprehensive loss, net of tax (unaudited)		—		—		—		(87,821	)		—			(87,821	)
Balance, March 31, 2020	$	—	$	—	$	41,922,903	$	(1,964,916	)	$	—		$	39,957,987
Net income for the three months ended June 30, 2020 (unaudited)		—		—		201,762		—			—			201,762
Other comprehensive income, net of tax (unaudited)		—		—		—		466,384			—			466,384
Balance, June 30, 2020	$	—	$	—	$	42,124,665	$	(1,498,532	)	$	—		$	40,626,133
Net income for the three months ended September 30, 2020 (unaudited)		—		—		333,792		—			—			333,792
Other comprehensive loss, net of tax (unaudited)		—		—		—		(38,250	)		—			(38,250	)
Balance, September 30, 2020	$	—	$	—	$	42,458,457	$	(1,536,782	)	$	—		$	40,921,675


Balance, December 31, 2020	$	—	$	—	$	41,973,211	$	(2,114,923	)	$	—		$	39,858,288
Net income for the three months ended March 31, 2021 (unaudited)		—		—		764,933		—			—			764,933
Other comprehensive loss, net of tax (unaudited)		—		—		—		(116,965	)		—			(116,965	)
Balance, March 31, 2021	$	—	$	—	$	42,738,144	$	(2,231,888	)	$	—		$	40,506,256
Net income for the three months ended June 30, 2021 (unaudited)		—		—		570,203		—			—			570,203
Other comprehensive income, net of tax (unaudited)		—		—		—		27,966			—			27,966
Balance, June 30, 2021	$	—	$	—	$	43,308,347	$	(2,203,922	)	$	—		$	41,104,425
Net income for the three months ended September 30, 2021 (unaudited)		—		—		597,844		—			—			597,844
Other comprehensive loss, net of tax (unaudited)		—		—		—		(89,562	)		—			(89,562	)
Proceeds from issuance of common stock, net of offering expenses		48,984		47,411,073		—		—			—			47,460,057
Purchases of shares of common stock by the ESOP		—		—		—		—			(3,918,680	)		(3,918,680	)
Balance, September 30, 2021	$	48,984	$	47,411,073	$	43,906,191	$	(2,293,484	)	$	(3,918,680	)	$	85,154,084

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED


	Nine Months Ended September 30,
	2021			2020
Cash Flows from Operating Activities
Net income	$	1,932,980		$	792,900
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation, amortization and accretion		330,112			301,291
Provision for allowance for loan losses		123,183			779,758
Gain on sale of other real estate owned		—			(6,986	)
Increase in cash surrender value of bank owned life insurance		(212,317	)		(226,336	)
Gain on mortgage loans sold, net		(1,638,612	)		(744,323	)
Proceeds from the sale of mortgage loans held for sale		78,856,454			41,822,734
Originations of mortgage loans held for sale		(78,467,117	)		(45,348,898	)
Change in:
Accrued interest receivable and other assets		521,730			(1,237,334	)
Accrued interest payable and other liabilities		783,904			238,307
Net cash provided by (used in) operating activities		2,230,317			(3,628,887	)
Cash Flows from Investing Activities
Net change in interest-bearing deposits in other banks		2,201,000			2,694,000
Purchases of investment securities available-for -sale		(30,688,457	)		—
Proceeds from calls, paydowns and maturities of investment securities available-for-sale		3,022,800			4,065,144
Purchase of other investments		—			(432,400	)
Proceeds from sales of other investments		523,300			118,600
Net change in loans		(5,030,481	)		(26,676,610	)
Proceeds from sales of other real estate owned		—			13,500
Proceeds from sales of premises and equipment		—			11,493
Purchases of premises and equipment		(125,729	)		(347,710	)
Net cash used in investing activities		(30,097,567	)		(20,553,983	)
Cash Flows from Financing Activities:
Net increase in deposits		207,626			8,882,732
Proceeds from Federal Home Loan Bank advances		—			10,000,000
Repayments of Federal Home Loan Bank advances		(9,515,477	)		(2,839,285	)
Proceeds from sale of common stock		48,983,500
Stock offering expenses		(1,523,443	)		—
Common stock purchased by ESOP		(3,918,680	)		—
Net cash provided by financing activities		34,233,526			16,043,447
Net Change in Cash and Cash Equivalents		6,366,276			(8,139,423	)
Cash and Cash Equivalents, Beginning of Period		41,876,399			24,191,882
Cash and Cash Equivalents, End of Period	$	48,242,675		$	16,052,459
Supplement Disclosures of Cash Flow Information:
Cash paid during the period for interest	$	844,628		$	1,993,408
Cash received from tax refund		—		$	26,976
Non-Cash Investing and Financing Activities:
Transfer of loans to other real estate owned	$	1,297,200		$	—
Change in unrealized (losses) gains on securities-for-sale, net of tax	$	(178,561	)	$	340,313

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

TC BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – GENERAL; BASIS OF PRESENTATION

Nature of Operations:

TC Federal Bank (“Bank”) was organized in 1934 and chartered in 1937 by the Federal Home Loan Bank Board as a mutual savings and loan association owned 100% by its depositors. Effective January 1, 2018, the Bank amended its corporate name to TC Federal Bank. On July 20, 2021, the Bank converted to a federal stock savings bank and established a stock holding company, TC Bancshares, Inc. (the “Company”), as parent of the Bank. The Bank operates one branch in Thomasville, Georgia, and one in Tallahassee, Florida as well as loan production offices in Tallahassee, Florida and Savannah, Georgia, that provide a variety of services to individuals and corporate customers in their markets. The Bank’s primary deposit products are interest-bearing checking accounts, savings accounts, and certificates of deposit. Its primary lending products consist of single-family residential mortgage loans and commercial and multi-family real estate loans. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank undergoes periodic examinations by the OCC. The Company is subject to the supervision, examination, and reporting requirments of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve").

Basis of Presentation:

The accounting and financial reporting policies of the Company and the Bank conform, in all material respects to accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. The condensed financial statements in the quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management reflect all necessary adjustments for a fair presentation of the Company's consolidated financial position and consolidated results of operations. All adjustments were of a normal and recurring nature. The condensed financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the condensed financial statements do not include all information and footnotes required by GAAP for complete financial presentation and should be read in conjunction with our financial statements, and notes thereto, for the year ended December 31, 2020 included in the Form S-1 of TC Federal Bank as filed with the SEC. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year or any future period.

In 2020, Coronavirus Disease 2019 ("COVID-19") spread into a worldwide pandemic. The pandemic may impact various parts of the Company's future operations and financial results, including additional allowance for loan loss provisions. Management believes the Company is taking appropriate actions to mitigate the negative impact. However, the full impact of COVID-19 on the allowance for loan losses as of September 30, 2021 cannot be reasonably estimated, as these events are still developing.

Earnings per Share:

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental commons shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

For the three and nine months ended September 30, 2021, earnings per share is calculated for the period that the Company's shares of common stock were outstanding (July 20, 2021 through September 30, 2021). The net earnings for this period was approximately $452,000 and the weighted average shares outstanding were 3,844,941.

Summary of Significant Accounting Policies:

The accounting and reporting policies of the Company and the Bank conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Bank’s financial statements for the year ended December 31, 2020 included in the Bank’s Form S-1.

Employee Stock Ownership Plan:

The Company sponsors an employee stock ownership loan ("ESOP") that covers all employees who meet certain service requirements. The Company will make annual contributions to the ESOP in amounts as defined by the plan document. These contributions are used to pay debt service and purchase additional shares. Certain ESOP shares are pledged as collateral for debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proprtion of debt service paid in the year.

In connection with the Company's initial public stock offering, the ESOP borrowed $3.9 million payable to the Company for the purpose of purchasing shares of the Company's common stock. A total of 391,868 shares were purchased with the loan proceeds. Because the source of the loan payments are contributions received by the ESOP from the Company, the related notes receivable is shown as a reduction of stockholders' equity.

Recent Accounting Pronouncements:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now include forward-looking information in the determination of their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, this update amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This update clarified the effective date of ASC 2016-13 for nonpublic business entities to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application of ASU 2016-13 will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated condensed financial statements.

In August 2018, the FASB issued ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this ASU did not have a significant impact on the Company's consolidated condensed financial statements.

In August 2018, the FASB issued ASU 2018-14 – Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This ASU is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities. Management does not expect the adoption of this ASU to have a significant impact on the Company's consolidated condensed financial statements.

In December 2019, the FASB issued ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. Management does not expect the adoption of this ASU to have a significant impact on the Company's consolidated condensed financial statements.

In May 2021, the FASB issued ASU 2021-04- Earning per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This ASU provides clarity and reduction in diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The amendments in this ASU affect all entities that issue freestanding written call options that are classified in equity. Specifically,

the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings per Share. The amendments do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. The amendments do not affect a holder's accounting for freestanding call options. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Management does not expect the adoption of this ASU to have a significant impact on the Company's consolidated condensed financial statements.

Emerging Growth Company Status:

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as the Company is an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. The Company intends to elect to use the extended transition period described above and intends to maintain its emerging growth company status as allowed under the JOBS Act.

NOTE 2 - INVESTMENT SECURITIES

Investment securities available-for-sale at September 30, 2021 and December 31, 2020 are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total
September 30, 2021-
US treasuries	$	5,134,372	$	61,878	$	—	$	5,196,250		12	%
Mortgage-backed securities		9,102,115		230,179		3,795		9,328,499		22	%
Collateralized mortgage obligations		19,661,896		119,544		104,885		19,676,555		45	%
Municipal bonds		6,746,206		511		38,445		6,708,272		15	%
Corporate obligations		2,375,000		780		5,763		2,370,017		5	%
	$	43,019,589	$	412,892	$	152,888	$	43,279,593		100	%

December 31, 2020-
Mortgage-backed securities	$	5,943,804	$	336,801	$	—	$	6,280,605		39	%
Collateralized mortgage obligations		8,966,213		168,852		—		9,135,065		57	%
Corporate obligations		499,580		1,616		—		501,196		3	%
	$	15,409,597	$	507,269	$	—	$	15,916,866		100	%

The following outlines the unrealized losses and estimated fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020:


	September 30, 2021				December 31, 2020
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Unrealized loss for less than 12 months:
US treasuries	$	—	$	—	$	—	$	—
Mortgage-backed securities		1,654,950		3,795		—		—
Collateralized mortgage obligations		11,287,602		104,885		—		—
Municipal bonds		4,563,663		38,445
Corporate obligations		1,369,237		5,763		—		—
Total less than 12 months	$	18,875,452	$	152,888	$	—	$	—

There were no unrealized losses at December 31, 2020 and no unrealized losses for greater than 12 months as of September 30, 2021. The unrealized losses at September 30, 2021 were on 15 securities and arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades or the repayment sources of principal and interest are backed by government entities. The Bank does not intend to sell the investments and it is not likely that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value
Investment securities with maturities -
Within 1 year	$	—	$	—
1 to 5 years		—		—
5 to 10 years		14,255,578		14,274,539
Over 10 years		—		—
Mortgage-backed securities and collateralized mortgage obligations		28,764,011		29,005,054
Total	$	43,019,589	$	43,279,593

The Bank did not sell any investment securities available-for-sale for the nine months ended September 30, 2021 or 2020. Securities with carrying values of approximately $154,000 and $265,000 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits as required by law and for other purposes.

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans, by purpose code, at September 30, 2021 and December 31, 2020, are summarized as follows:


	September 30, 2021		Percent			December 31, 2020		Percent
Real estate loans:
Residential	$	95,890,048		35.33	%	$	105,837,324		39.56	%
Home equity		11,525,396		4.25	%		8,892,417		3.32	%
Multi-family		19,162,865		7.06	%		15,140,468		5.66	%
Commercial		84,750,748		31.23	%		72,717,869		27.18	%
Construction and land development		29,400,305		10.83	%		29,982,506		11.21	%
Total real estate loans		240,729,362					232,570,584
Consumer loans		6,160,755		2.27	%		5,372,529		2.01	%
Commercial and industrial loans		24,486,594		9.02	%		29,599,982		11.06	%
Total loans		271,376,711		100.00	%		267,543,095		100.00	%
Less: Allowance for loan losses		4,247,078					4,085,719
Deferred loan fees		1,163,568					1,101,409
Loans, net	$	265,966,065				$	262,355,967

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations primarily in Thomas County, Georgia and other surrounding areas. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent on the real estate market.

The Bank has divided the loan portfolio into seven portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Bank are real estate - residential, real estate - home equity, real estate - multi-family, real estate - commercial, real estate - construction and land development, consumer loans and commercial and industrial loans.

Real Estate - Residential: The Bank originates residential real estate loans for the purchase or refinancing of a mortgage. These loans are primarily collateralized by owner-occupied properties and rental properties located primarily in the Bank’s market areas.

Real Estate - Home Equity: The Bank originates home equity real estate loans to provide home equity lines of credit and closed-end home equity loans. These loans are primarily collateralized by owner-occupied properties located primarily in the Bank’s market areas.

Real Estate - Multi-family: Multi-family loans consist of loans to finance real estate purchases, refinancings, expansions and improvements to multi-family properties. These loans may be secured by, but are not limited to, first liens on apartments, mobile home parks or other mutli-family properties primarily located within the Bank’s market areas. The Bank’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s and borrower’s related entities’ financial condition, and a detailed analysis of the borrower’s underlying cash flows. Multi-family loans are larger than residential or home equity loans and involve greater credit risk. The repayment of these loans largely depends on the results of operations and management

of these properties. Adverse economic conditions also affect the repayment ability to a greater extent than residential or home equity real estate loans.

Real Estate - Commercial: Commercial real estate loans consist of loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. These loans may be secured by first liens on office buildings, farms, retail and mixed-use properties, churches, warehouses and restaurants primarily located within the Bank’s market areas. The Bank’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s and borrower’s related entities’ financial condition, and a detailed analysis of the borrower’s underlying cash flows. Commercial real estate loans are larger than residential loans and involve greater credit risk. The repayment of these loans largely depends on the results of operations and management of these properties. Adverse economic conditions also affect the repayment ability to a greater extent than residential real estate loans.

Real Estate - Construction and land development: These loans are made to borrowers to build commercial structures, a primary or secondary residence and, in some cases, to real estate investors to acquire and develop land. These loans are more difficult to evaluate since they are significantly more vulnerable to changes in economic conditions. In addition, these loans possess a higher degree of credit risk since they are made based on estimates of the future worth of a project and the estimated costs required for completion. The Bank limits its overall investment in this portfolio segment due both to management’s assessment of risk and certain percentage guidance set by the regulatory agencies.

Consumer: Consumer loans mainly consist of personal loans, revolving credit plans and other loans. The Bank’s consumer loans may be uncollateralized and rely on the borrower’s income for repayment.

Commercial and industrial: Commercial and industrial loans consist generally of business loans and lines of credit to companies in the Bank’s market area. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Such loans are usually collateralized by the financed assets, although a portion may be made on an unsecured basis and contain the guarantee of the business principals. The Bank’s underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business.

Commercial and industrial loans also include loans originated under the Paycheck Protection Program (“PPP”), as prescribed in the Coronavirsus Aid, Relief, and Economic Security ("CARES") Act. These loans have an interest rate of 1.0% and a two-year or five-year loan term to maturity. The Small Business Administration (“SBA”) guarantees 100% of the PPP loans made to eligible borrowers, and loan proceeds may be partially or fully forgiven by the SBA if the funds are used for eligible expenses during the relevant forgiveness period and the borrower meets the employee retention criteria.

The Bank was paid a processing fee from the SBA on PPP loan originations ranging from 1% to 5%, based on the size of the loans. For the nine months ended September 30, 2021, the Bank had recorded approximately $481,000 in PPP-related SBA fees. No PPP-related SBA fees were recorded for the three months ended September 30, 2021. The Bank is accreting these fees into interest income over the estimated life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. For the three and nine months ended September 30, 2021, the Bank had recognized approximately $151,000 and $436,000 in PPP-related SBA fees, respectively. The majority of the remaining unearned fees are expected to be recognized as the PPP loans are forgiven or paid off. Deferred PPP-related SBA fees totaled $436,000 and $260,000 at September 30, 2021 and December 31, 2020, respectively.

Allowance for Loan Losses:

An analysis of the change in allowance for loan losses follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021			2020
Beginning balance	$	4,119,010		$	3,817,452	$	4,085,719		$	3,064,777
Charge-offs:
Real estate loans:
Residential		—			—		(11,123	)		(2,951	)
Home equity		—			—		—			—
Multi-family		—			—		—			—
Commercial		—			—		—			—
Construction and land development		—			—		—			—
Total real estate loans		—			—		(11,123	)		(2,951	)
Consumer loans		(6,448	)		—		(28,037	)		—
Commercial and industrial loans		—			—		—			—
Total charge-offs		(6,448	)		—		(39,160	)		(2,951	)
Recoveries:
Real estate loans:
Residential		9,979			25,373		22,256			118,431
Home equity		—			—		—			—
Multi-family		—			—		—			—
Commercial		—			—		—			—
Construction and land development		13,047			12,913		24,392			31,051
Total real estate loans		23,026			38,286		46,648			149,482
Consumer loans		1,155			1,985		6,309			7,435
Commercial and industrial loans		3,499			9,250		24,379			47,835
Total recoveries		27,680			49,521		77,336			204,752
Net recoveries		21,232			49,521		38,176			201,801
Provision for allowance for loan losses		106,836			179,363		123,183			779,758
Ending balance	$	4,247,078		$	4,046,336	$	4,247,078		$	4,046,336

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2021 and December 31, 2020:


	Loans				Allowance for loan losses
	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
September 30, 2021 -
Real estate loans:
Residential	$	1,570,793	$	94,319,255	$	—	$	1,453,148
Home equity		—		11,525,396		—		175,034
Multi-family		—		19,162,865		—		293,384
Commercial		—		84,750,748		—		1,697,976
Construction and development		10,121		29,390,184		—		348,481
Total real estate loans		1,580,914		239,148,448		—		3,968,023
Consumer loans		—		6,160,755		—		1,766
Commercial and industrial loans		315,122		24,171,472		78,780		70,728
Unallocated		—		—		—		127,781
Total	$	1,896,036	$	269,480,675	$	78,780	$	4,168,298
December 31, 2020 -
Real estate loans:
Residential	$	1,480,633	$	104,356,691	$	—	$	1,444,921
Home equity		675		8,891,742		—		133,985
Multi-family		—		15,140,468		—		311,409
Commercial		1,339,199		71,378,670		—		1,531,037
Construction and development		11,637		29,970,869		—		387,127
Total real estate loans		2,832,144		229,738,440		—		3,808,479
Consumer loans		—		5,372,529		—		1,360
Commercial and industrial loans		—		29,599,982		—		101,497
Unallocated		—		—		—		174,383
Total	$	2,832,144	$	264,710,951	$	—	$	4,085,719

Impaired Loans:

The following tables present impaired loans by class of loans as of September 30, 2021 and December 31, 2020:


	Recorded Investment		Principal Balance		Related Allowance
September 30, 2021 -
Impaired loans with related allowance:
Real estate loans:
Residential	$	—	$	—	$	—
Home equity		—		—		—
Multi-family		—		—		—
Commercial		—		—		—
Construction and land development		—		—		—
Total real estate loans		—		—		—
Consumer loans		—		—		—
Commercial and industrial loans		315,122		315,122		78,780
Total	$	315,122	$	315,122	$	78,780
Impaired loans without related allowance:
Real estate loans:
Residential	$	1,570,793	$	1,570,793	$	—
Home equity		—		—		—
Multi-family		—		—		—
Commercial		—		—		—
Construction and land development		10,121		10,121		—
Total real estate loans		1,580,914		1,580,914		—
Consumer loans		—		—		—
Commercial and industrial loans		—		—		—
Total	$	1,580,914	$	1,580,914	$	—


	Recorded Investment		Principal Balance		Related Allowance
December 31, 2020 -
Impaired loans with related allowance:
Real estate loans:
Residential	$	—	$	—	$	—
Home equity		—		—		—
Multi-family		—		—		—
Commercial		—		—		—
Construction and land development		—		—		—
Total real estate loans		—		—		—
Consumer loans		—		—		—
Commercial and industrial loans		—		—		—
Total	$	—	$	—	$	—
Impaired loans without related allowance:
Real estate loans:
Residential	$	1,480,633	$	1,480,633	$	—
Home equity		675	$	675		—
Multi-family		—	$	—		—
Commercial		1,339,199		1,339,199		—
Construction and land development		11,637		11,637		—
Total real estate loans		2,832,144		2,832,144		—
Consumer loans		—		—		—
Commercial and industrial loans		—		—		—
Total	$	2,832,144	$	2,832,144	$	—

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows:


	Three Months Ended September 30,
	2021						2020
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received
Real estate loans:
Residential	$	1,589,919	$	48,846	$	24,631	$	1,975,906	$	49,468	$	45,144
Home equity		—		—		—		2,204		131		164
Multi-family		—		—		—		—		—		—
Commercial		669,600		—		—		1,605,773		—		—
Construction and land development		10,408		355		129		6,191		501		501
Total real estate loans		2,269,927		49,201		24,760		3,590,074		50,100		45,809
Consumer loans		39,390		10,755		13,139		—		—		—
Commercial and industrial loans		—		—		—		—		—		—
Total	$	2,309,317	$	59,956	$	37,899	$	3,590,074	$	50,100	$	45,809


	Nine Months Ended September 30,
	2021						2020
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received
Real estate loans:
Residential	$	1,571,775	$	70,611	$	70,743	$	1,524,632	$	89,135	$	104,397
Home equity		598		—		—		4,172		172		172
Multi-family		—		—		—		—		—		—
Commercial		1,039,595		—		—		1,425,655		—		—
Construction and land development		68,876		399		358		298,125		501		501
Total real estate loans		2,680,844		71,010		71,101		3,252,584		89,808		105,070
Consumer loans		—		10,755		13,139		—		—		—
Commercial and industrial loans		—		—		—		—		—		—
Total	$	2,680,844	$	81,765	$	84,240	$	3,252,584	$	89,808	$	105,070

Past Due and Nonaccrual Loans:

The following tables present the aging of the recorded investment in past due loans and nonaccrual loans as of September 30, 2021 and December 31, 2020, by class of loans:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total		Non-accrual
September 30, 2021 -
Real estate loans:
Residential	$	—	$	140,783	$	—	$	140,783	$	95,749,265	$	95,890,048	$	374,847
Home equity		43,093		—		—		43,093		11,482,303		11,525,396		—
Multi-family		—		—		—		—		19,162,865		19,162,865		—
Commercial		129,911		—		—		129,911		84,620,837		84,750,748		—
Construction and land development		60,111		—		—		60,111		29,340,194		29,400,305		—
Total real estate loans		233,115		140,783		—		373,898		240,355,464		240,729,362		374,847
Consumer loans		—		—		—		—		6,160,755		6,160,755		—
Commercial and industrial loans		27,497		—		—		27,497		24,459,097		24,486,594		315,122
	$	260,612	$	140,783	$	—	$	401,395	$	270,975,316	$	271,376,711	$	689,969
December 31, 2020 -
Real estate loans:
Residential	$	40,583	$	84,167	$	196,826	$	321,576	$	105,515,748	$	105,837,324	$	623,998
Home equity		—		—		—		—		8,892,417		8,892,417		—
Multi-family		—		—		—		—		15,140,468		15,140,468		—
Commercial		—		—		1,339,199		1,339,199		71,378,670		72,717,869		1,339,199
Construction and land development		—		—		—		—		29,982,506		29,982,506		—
Total real estate loans		40,583		84,167		1,536,025		1,660,775		230,909,809		232,570,584		1,963,197
Consumer loans		—		—		—		—		5,372,529		5,372,529		—
Commercial and industrial loans		151,136		—		—		151,136		29,448,846		29,599,982		—
	$	191,719	$	84,167	$	1,536,025	$	1,811,911	$	265,731,184	$	267,543,095	$	1,963,197

As of September 30, 2021, there were no loans greater than 90 days past due and still accruing. As of December 31, 2020, there was one loan greater than 90 days past due and still accruing totaling approximately $16,000.

Troubled Debt Restructurings:

The Bank did not modify any loans in the nine months ended September 30, 2021 and 2020 in a manner that would be considered troubled debt restructurings. There were no specific allowances allocated to troubled debt restructurings as of September 30, 2021 or 2020. The Bank did not commit to lend any additional amounts to customers with outstanding loans that are classified as troubled restructurings. Certain troubled debt restructurings are accruing loans in which interest is earned when payments are made. Management continues to evaluate these accruing troubled debt restructurings for impairment on a quarterly basis. During the nine months ended September 30, 2021 and 2020, no restructured loans defaulted subsequent to modification.

COVID-19 Related Loan Modifications:

The Bank implemented a customer payment deferral program to assist borrowers that may be experiencing financial hardship due to COVID-19 related challenges, whereby short-term deferrals of payments (generally three to six months) have been provided. As of September 30, 2021 and December 31, 2020, all loans that were granted COVID-19 related payment deferrals had resumed making payments under the terms of the original loan agreements. Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals continued to be reported as current loans throughout the agreed upon deferral period and were not classified as troubled debt restructurings.

Credit Quality:

The Bank categorized loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:

Special Mention. Evidence of financial deterioration exists, or file documentation is inadequate or not available to determine the borrower’s financial status or ability to repay. The loan possesses potential weakness which may, if not reversed or corrected, weaken the credit or inadequately protect the Bank’s position.

Substandard. A well-defined weakness or weaknesses exists that jeopardizes the liquidation of the debt. The loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. All of the weaknesses of a substandard loan exist, with the added characteristic that the weaknesses jeopardize the collection and/or liquidation of the debt. Loss exposure, while evident, is not clearly determinable. Special workout negotiations and/or litigation should be initiated.

Loss. Considered uncollectible in full and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of September 30, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
September 30, 2021 -
Real estate loans:
Residential	$	93,896,708	$	722,233	$	1,271,107	$	—	$	—	$	95,890,048
Home equity		11,525,396		—		—		—		—		11,525,396
Multi-family		19,162,865		—		—		—		—		19,162,865
Commercial		73,636,282		8,128,452		2,986,014		—		—		84,750,748
Construction and land development		25,323,624		3,940,809		135,872		—		—		29,400,305
Total real estate loans		223,544,875		12,791,494		4,392,993		—		—		240,729,362
Consumer loans		6,160,755		—		—		—		—		6,160,755
Commercial and industrial loans		24,080,267		91,205		236,342		—		78,780		24,486,594
	$	253,785,897	$	12,882,699	$	4,629,335	$	—	$	78,780	$	271,376,711
December 31, 2020 -
Real estate loans:
Residential	$	102,229,498	$	1,243,538	$	2,364,288	$	—	$	—	$	105,837,324
Home equity		8,891,742		—		675		—		—		8,892,417
Multi-family		14,831,774		308,694		—		—		—		15,140,468
Commercial		67,305,357		4,073,313		1,339,199		—		—		72,717,869
Construction and land development		25,390,597		2,950,389		1,641,520		—		—		29,982,506
Total real estate loans		218,648,968		8,575,934		5,345,682		—		—		232,570,584
Consumer loans		5,372,529		—		—		—		—		5,372,529
Commercial and industrial loans		27,643,564		466,020		1,490,398		—		—		29,599,982
	$	251,665,061	$	9,041,954	$	6,836,080	$	—	$	—	$	267,543,095

NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

The Bank did not have any Federal Home Loan Bank ("FHLB") advances outstanding as of September 30, 2021, as all outstanding advances were paid off in July 2021 and resulted in a gain on extinguishment of debit of $12,000. The following advances from the FHLB were outstanding as of December 31, 2020:

December 31, 2020 -

Advance Date

Amount

Rate

Interest Rate

Maturity

Call Feature

January 7, 2008

208,334

Fixed

4.49

January 9, 2023

N/A

September 20, 2012

450,000

Fixed

1.80

September 20, 2022

N/A

April 1, 2020

4,333,333

Fixed

0.66

April, 1 2025

N/A

April 7, 2020

4,523,810

Fixed

0.79

April 7, 2027

N/A

9,515,477

The FHLB advances were collateralized by the Bank’s FHLB stock and a blanket lien on certain of the Bank’s residential and commercial real estate loans with a carrying value of approximately $18,387,000 and $37,248,000 at September 30. 2021 and December 31, 2020, respectively. The Bank had approximately $18,400,000 and $19,200,000 in available borrowing capacity through the FHLB at September 30, 2021 and December 31, 2020, respectively.

Unsecured federal funds lines of credit totaling $19,500,000 and $18,300,000 were available to the Bank for overnight borrowing through correspondent banks at September 30, 2021 and December 31, 2020, respectively. The Bank also had approximately $6,088,000 and $9,900,000 in available borrowing capacity through the Federal Reserve Bank of Atlanta at September 30, 2021 and December 31, 2020, respectively. There were no borrowings against either of these facilities at September 30, 2021 or December 31, 2020. The available borrowings with the Federal Reserve Bank are collateralized by a blanket lien on certain of the Bank’s residential and commercial real estate loans with a carrying value of approximately $10,189,000 and $15,000,000 at September 30, 2021 and December 31, 2020, respectively.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

Credit Related Financial Instruments:

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.


	September 30, 2021		December 31, 2020
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	22,040,000	$	30,288,000
Stand-by letters of credit	$	913,000	$	725,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation. Collateral held varies but may include unimproved and improved real estate, certificates of deposit, or personal property.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to businesses within the Bank’s trade area.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds real estate and assignments of deposit accounts as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for these commitments at September 30, 2021 and December 31, 2020 varies.

NOTE 6 - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under certain adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July 2013, the Federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions and, pursuant to the Federal Reserve Board’s policy statements, to top-tier bank and savings and loan holding companies with total consolidated assets of $3.0 billion or more. The rule established a new common equity Tier 1 minimum capital requirement, increased the minimum capital ratios and assigned a higher risk weight to certain assets based on the risk associated with these assets. The final rule includes a transition period that implements the new regulations over a five-year period. These changes were phased in beginning in January 2015.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total common equity Tier 1, total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of September 30, 2021 and December 31, 2020, that the Bank met all capital adequacy requirements to which it is subject.

As of September 30, 2021 and December 31, 2020, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1 risk-based, total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Bank’s actual capital amounts and ratios, and minimum amounts under current regulatory standards, as of September 30, 2021 and December 31, 2020, are presented in the following table:


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
September 30, 2021:
Common Equity Tier 1 Capital to Risk-Weighted Assets	$	62,313		24.84	%	$	11,287		4.50	%	$	16,304		6.50	%
Total Capital to Risk- Weighted Assets	$	65,462		26.10	%	$	20,066		8.00	%	$	25,083		10.00	%
Tier 1 Capital to Risk- Weighted Assets	$	62,313		26.84	%	$	15,050		6.00	%	$	20,066		8.00	%
Tier I Capital to Average Assets	$	62,313		15.83	%	$	15,743		4.00	%	$	19,678		5.00	%
December 31, 2020:
Common Equity Tier 1 Capital to Risk-Weighted Assets	$	40,090		16.46	%	$	10,963		4.50	%	$	15,835		6.50	%
Total Capital to Risk- Weighted Assets	$	43,148		17.71	%	$	19,489		8.00	%	$	24,361		10.00	%
Tier 1 Capital to Risk- Weighted Assets	$	40,090		16.46	%	$	14,617		6.00	%	$	19,489		8.00	%
Tier I Capital to Average Assets	$	40,090		11.73	%	$	13,673		4.00	%	$	17,091		5.00	%

NOTE 7 - FAIR VALUE MEASUREMENT

The Bank utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. From time to time, the Bank may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Additionally, the Bank is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Bank groups assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based 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. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Assets Recorded at Fair Value on a Recurring Basis. The table below presents the recorded amount of assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020, all of which consisted of investment securities available-for-sale:


	Level 1		Level 2		Level 3		Total
September 30, 2021:
US treasuries	$	—	$	5,196,250	$	—	$	5,196,250
Mortgage-backed securities		—		9,328,499		—		9,328,499
Collateralized mortgage obligations		—		19,676,555		—		19,676,555
Municipal bonds		—		6,708,272				6,708,272
Corporate obligations		—		2,370,017		—		2,370,017
Investment securities available-for-sale	$	—	$	43,279,593	$	—	$	43,279,593
December 31, 2020:
Mortgage-backed securities	$	—	$	6,280,605	$	—	$	6,280,605
Collateralized mortgage obligations		—		9,135,065		—		9,135,065
Corporate obligations		—		501,196		—		501,196
Investment securities available-for-sale	$	—	$	15,916,866	$	—	$	15,916,866

Assets Recorded at Fair Value on a Nonrecurring Basis. The Bank may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2021 and December 31, 2020:


	Level 1		Level 2		Level 3		Total
September 30, 2021:
Other real estate owned	$	—	$	—	$	1,378,200	$	1,378,200
Impaired loans		—		—		—		—
	$	—	$	—	$	1,378,200	$	1,378,200
December 31, 2020:
Other real estate owned	$	—	$	—	$	81,000	$	81,000
Impaired loans		—		—		—		—
	$	—	$	—	$	81,000	$	81,000

The following methods and assumptions were used to estimate the fair value of each class of assets and liabilities either recorded or disclosed at fair value.

Cash and Cash Equivalents. The carrying value of cash and cash equivalents is a reasonable estimate of fair value.

Certificates of deposit with other banks. The carrying value of certificates of deposit with other banks is a reasonable estimate of fair value.

Investment Securities Available-for-Sale. Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities and collateralized

mortgage obligations issued by government sponsored enterprises and state, county and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other Investments. Other investments consist of FHLB stock whose carrying value approximates its fair value.

Mortgage Loans Held for Sale. The estimated fair value of mortgage loans held for sale, classified within Level 2, is approximated by the carrying value, given the short-term nature of the loans and similarly to what secondary markets are currently offering for portfolios of loans with similar characteristics.

Loans. The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses. Loans for which it is probable that payment of interest and/or principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans in which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Bank records the impaired loan as nonrecurring Level 2. When an appraised value is utilized or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3.

Other Real Estate Owned. Other real estate owned properties are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Subsequently, other real estate owned assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value is based on an observable market price, the Bank records the other real estate owned as nonrecurring Level 2. When the fair value is based on an appraised value, or when an appraised value is not available, the Bank records the other real estate owned asset as nonrecurring Level 3.

Bank Owned Life Insurance. The carrying value of Bank Owned Life Insurance approximates fair value.

Commitments to Extend Credit. Commitments to extend credit are short-term and, therefore, the carrying value and the fair value are considered immaterial for disclosure.

Deposits. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of savings accounts approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected maturities of time deposits.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances are carried at cost and the fair value is obtained from the Federal Home Loan Bank of Atlanta.

The carrying amounts and estimated fair values of the Bank’s financial instruments as of September 30, 2021 and December 31, 2020 are as follows:


			Fair Value Measurements at September 30, 2021
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	48,242,675	$	48,242,675	$	48,242,675	$	—	$	—
Certificates of deposit with other banks		3,451,000		3,451,000		3,451,000		—		—
Investment securities available-for- sale		43,279,593		43,279,593		—		43,279,593		—
Other investments		190,700		190,700		—		190,700		—
Mortgage loans held for sale		4,194,237		4,194,237		—		4,194,237		—
Loans, net		265,966,065		277,899,000		—		—		277,899,000
Bank owned life insurance		11,095,745		11,095,745		11,095,745		—		—
Financial liabilities:
Deposits		294,307,453		327,179,000		217,689,345		—		109,489,655


			Fair Value Measurements at December 31, 2020
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	41,876,399	$	41,876,399	$	41,876,399	$	—	$	—
Certificates of deposit with other banks		5,652,000		5,652,000		5,652,000		—		—
Investment securities available-for- sale		15,916,866		15,916,866		—		15,916,866		—
Other investments		714,000		714,000		—		714,000		—
Mortgage loans held for sale		2,944,962		2,944,962		—		2,944,962		—
Loans, net		262,355,967		277,366,000		—		—		277,366,000
Bank owned life insurance		10,883,428		10,883,428		10,883,428		—		—
Financial liabilities:				—
Deposits		294,099,827		313,033,000		207,523,546		—		105,509,454
FHLB advances		9,515,477		9,631,000		—		—		9,631,000

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

NOTE 8 – CHANGE IN CORPORATE FORM

The Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to the Company (the "Conversion"). The Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock pursuant to an independent valuation appraisal of the Bank and the Company. The stock was priced at $10.00 per share. In addition, the Bank’s board of directors adopted an employee stock ownership plan ("ESOP") which subscribed for 8% of the common stock sold in the offering. The Conversion was completed on July 20, 2021 and resulted in the issuance of 4,898,350 common shares by the Company, of which 391,868 were issued to the ESOP. The cost of the Conversion and issuing the capital stock totaled $1.3 million and was deducted from the proceeds of the offering.

In accordance with OCC regulations, at the time of the Conversion, the Bank substantially restricted retained earnings by establishing a $42.0 million liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that eligible holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation by the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

Deferred conversion costs totaled approximately $116,000 at December 31, 2020.

Stock offering expenses totaled $1,523,443, which were deducted from the proceeds from the sale of common stock

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying unaudited financial statements and the notes thereto appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:



statements of our goals, intentions and expectations;



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



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



estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report on Form 10-Q.

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:



the effects of the COVID-19 pandemic on our business, customers, employees and third-party service providers;



general economic conditions, either nationally or in our market areas, that are worse than expected;



changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, including after CECL implementation;



our ability to access cost-effective funding;



fluctuations in real estate values and both residential and commercial real estate market conditions;



demand for loans and deposits in our market area;



our ability to implement and change our business strategies;



competition among depository and other financial institutions;



inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;



adverse changes in the securities or secondary mortgage markets;



changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III and CECL implementation;



changes to statutes, regulations or regulatory policies or practices resulting from the COVID-19 pandemic;



our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;



the impact of the Dodd-Frank Act and JOBS Act and the implementing regulations;



changes in the quality or composition of our loan or investment portfolios;



changes in consumer spending and saving habits;



the effects of harsh weather conditions, including hurricanes, and man-made disasters;



technological changes that may be more difficult or expensive than expected;



the inability of third party providers to perform as expected;



the efficiency and effectiveness of our internal control environment;



our ability to manage market risk, credit risk, interest rate risk, liquidity risk and operational risk in the current economic environment;



the soundness of other financial institutions;



our ability to enter new markets successfully and capitalize on growth opportunities;



our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;



changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;



our ability to retain key employees;



our management team’s ability to focus primarily on the operation of our business rather than diversion of management attention to responses to the COVID-19 pandemic;



our compensation expense associated with equity allocated or awarded to our employees; and



changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

In 2020, COVID-19 spread into a worldwide pandemic. The pandemic may impact various parts of the bank’s future operations and financial results, including additional allowance for loan loss provisions. Management believes the bank is taking appropriate actions to mitigate the negative impact. However, the full impact of COVID-19 on the allowance for loan losses as of September 30, 2021 cannot be reasonably estimated, as these events are still developing.

The following represent our significant accounting policies:

Allowance for Loan Losses. The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when the Asset Quality Committee (which consists of Board and management members) believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan

losses to a level that, in the Asset Quality Committee’s judgment, is adequate to absorb probable losses in the loan portfolio. The Asset Quality Committee’s evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involve judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the allowance for loan losses could change significantly.

The allocation methodology applied by the Bank is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, an ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While the Asset Quality Committee uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. The Asset Quality Committee believes the allowance for loan losses is appropriate at September 30, 2021. The allowance analysis is reviewed by the Asset Quality Committee on a no less than quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies and the Bank’s external auditors, periodically review the allowance for loan losses. As a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is the responsibility of the Bank and any increase or decrease in the allowance is the responsibility of the Asset Quality Committee.

Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

The Company files a federal and a state income tax return. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Coronavirus/COVID-19

The COVID-19 pandemic has already had a significant impact on our operating results, and we believe it will continue to have an impact for at least the remainder of the year ending December 31, 2021. We expect the short- and long-term economic consequences of COVID-19 to our customers to be significant, and that the continuing health safety concerns relating to the ongoing pandemic will change the way we conduct our business and interact with our customers.

Starting in March 2020, we realized the impact of the pandemic and economic shut down would have an immediate impact on selected segments of our customers. We did not automatically downgrade borrowers that requested a deferral. However, if the borrower requested a deferral that extended beyond the initial three months granted, we considered downgrades based on the trend in revenues. During the nine months ended September 30, 2021, there were no loans downgraded to substandard that had been on deferral. In September 2021, there was one $315,000 SBA guaranteed loan downgraded to substandard that resulted in $79,000 being identified as loss, and combined with our other lending activity, these adjustments resulted in $107,000 provision for loan losses for the three months ended September 30, 2021, and $123,000 provision for loan losses for the nine months ended September 30, 2021, compared to a $225,000 provision for loan losses for the three months ended March 31, 2020, $375,000 provision for loan losses for the three months ended June 30, 2020, and $179,000 provision for loan losses for the three months ended September 30, 2020, for a total of $780,000 provision for loan losses for the nine months ended September 30, 2020.

In addition, starting in March 2020, we modified the terms of loans with customers impacted by the COVID-19-pandemic to permit payment deferral. Through the end of December 31, 2020, these deferrals had affected a total of $46.6 million of loans, including $4.0 million of construction loans, $2.8 million of commercial and industrial loans, $7.9 million of owner-occupied commercial real estate loans and $17.9 million of non-owner-occupied commercial real estate loans. These deferrals are intended to provide customers with temporary relief. As of December 31, 2020, none of the loans with modification were still on modified terms and one loan in the amount of $315,000 was modified during September of 2021 to an interest only period of four months as the business is still suffering the effects of COVID-19. This loan was downgraded to substandard, and $79,000 identified as loss as the loan is 75% guaranteed by the SBA. We believe these actions provided our customers with the best chance to meet their longer-term obligations and for us to work with those who will not be able to meet their obligations or default on their loans.

Starting in April 2020, we worked with our customers to help them understand the Paycheck Protection Program (PPP) of the CARES Act. The PPP generally provides eligible employers with funds to pay payroll costs (including benefits) and interest on mortgages, rent and utilities, and the PPP loan may be forgiven to the extent the loan proceeds are applied to eligible expenditures during a specified measurement period. Funds are provided in the form of loans that will generally be fully forgiven when used for permissible expenditures, subject to certain reductions based on certain decreases in the employer’s full-time equivalent employees or salary and wages during the measurement period. To the extent not forgiven, a PPP loan is intended to be 100% guaranteed by the SBA and will have a term of two years (or five years if the PPP loan is made after June 4, 2020) and carry an interest rate of 1%. Payment of principal, interest and fees on PPP loans is deferred until the amount to be forgiven is finalized, in general. The Bank was paid a processing fee by the SBA on PPP loan originations ranging from 1% to 5% of the amount of the loan, based on the size of the loans. For the three and nine months ended September 30, 2021, the Bank had recorded approximately $0 and $481,000 in PPP-related SBA fees and is accreting these fees into interest income over the estimated life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. For the three and nine months ended September 30, 2021, the Bank has recognized approximately $151,300 and $436,000, respectively, in PPP-related SBA fees through accretion. The majority of the remaining unearned fees are expected to be recognized as the PPP loans are either forgiven or paid off.

During March 2020, the Federal Reserve reduced the federal funds rate by .50% as an initial response to the COVID-19 pandemic. Later in March 2020, the Federal Reserve reduced the target range for the federal funds rate to between 0.0% and 0.25%, compared to the previous target of between 1.00% and 1.25%. These rate reductions, combined with the decline of longer-term interest rates, had a negative impact on our net interest income during 2021, and potentially beyond. In 2020 and 2021, the PPP fee income was recorded as interest income, which will offset the decline in interest income due to rate reductions. After the PPP fee income has been fully accreted into income, we would expect lower levels of interest income going forward if market rates of interest remain at low levels.

Overview

We are a bank holding company and the Bank is a federally chartered savings bank headquartered in Thomasville, Georgia that has served the banking needs of our customers since 1934. We conduct our business from our main office in Thomasville, Georgia, a branch office and a residential mortgage center in Tallahassee, Florida and a commercial loan production office in Savannah, Georgia. The Bank provides a variety of services to individual and commercial customers in its market area. Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction and land development loans and consumer loans. At September 30, 2021, we had total assets of $386.7 million, total deposits of $294.3 million and total equity of $85.2 million. During 2019, the Bank elected to be treated as a “covered savings association” which allows us to engage in the same activities as a national bank.

Our primary deposit products are personal checking accounts, business checking accounts, savings accounts, money market accounts and certificates of deposit. Our lending products include single-family residential loans, home equity lines of credit, consumer loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction loans, land development loans and SBA/USDA guaranteed loans. We are primarily regulated by the Office of the Comptroller of the Currency and our deposits are insured by the Federal Deposit Insurance Corporation. We undergo periodic examinations by the Office of the Comptroller of the Currency. The Company is also regulated and periodically examined by the Federal Reserve.

We expect to continue to focus on originating one- to four-family residential real estate loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction and land development loans and consumer loans. We also invest in securities, which have historically consisted primarily of mortgage-backed securities issued by U.S. government sponsored enterprises. In recent years, we have originated single-family owner-occupied loans for sale into the secondary market and for our own portfolio. We intend to continue this activity in the future in order to generate fee income. We offer a variety of deposit accounts, including savings accounts, money market accounts, checking accounts and certificates of deposit.

As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. To help manage interest rate risk, we promote core deposit products and we are continuing to diversify our loan portfolio by adding more commercial-related loans. We seek to continue to increase our core checking accounts during 2021.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total Assets. Total assets increased $36.8 million, or 10.5%, to $386.7 million at September 30, 2021 from $349.9 million at December 31, 2020. The increase was principally due to an increase in investment securities available for sale of $27.4 million and cash and cash equivalents of $6.4 million.

Cash and Cash Equivalents. Cash and cash equivalents increased primarily from cash received from the TC Bancshares, Inc. stock offering, or $37.9 million, which was deposited into an interest bearing checking account at the Bank, of which $27.4 million was used to purchase investment securities available for sale..

Total Loans. Loans increased $3.9 million, or 1.5%, to $271.4 million at September 30, 2021 from $267.5 million at December 31, 2020. During the nine months ended September 30, 2021, commercial and multi-family real estate loans increased $16.1 million, or 18.3%, to $103.9 million from $87.9 million at December 31, 2020 due to new loan originations. Similarly, home equity loans increased $2.6 million, or 29.6%, to 11.5 million from $8.9 million at December 31, 2020, and consumer loans increased $0.8 million to $6.2 million, or 14.8%, from $5.4 million. However, loan balances in other categories decreased due to the payoff of loans.

Construction and land development loans decreased $0.6 million, or 1.9%, to $29.4 million at September 30, 2021 from $30.0 million at December 31, 2020. Commercial and industrial loans decreased $5.1 million, or 17.3%, to $24.5 million at September 30, 2021 from $29.6 million at December 31, 2020. It should be noted that $8.8 million of new PPP loans were funded in 2021 and $19.7 million of 2020 PPP loans were paid off through September 30, 2021. Residential real estate loans held for investment decreased $9.9 million, or 9.4%, from $105.8 million to $95.9 million at September 30, 2021. As a percentage of net loans, residential real estate loans fell from 39.6% of total loans at December 31, 2020 to 35.3% at September 30, 2021.

Allowances for Loan Losses. Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by chargeoffs, net of recovery. During the three months ended September 30, 2021, there was one $315,000 SBA guaranteed loan downgraded to substandard that resulted in $79,000 being identified as loss and represented a possible COVID-19 related credit loss. Combined with our other lending activity these adjustments resulted in $107,000 provision for loan losses for the three month ended September 30, 2021, and $123,000 provision for loan losses for the nine months ended September 30, 2021. The Company's 30 impaired loans, totaling $1.9 million at September 30, 2021 compared to $2.8 million at December 30, 2020, carried aggregate specific reserves of $79,000 at September 30, 2021, and there was no assigned unallocated reserves as none was expected. The Company took $21,000 in net recoveries during the three months ended September 30, 2021, compared to net recoveries of $50,000 for the three months ended September 30, 2020. None of the charge-offs taken in 2021 related to the COVID-19 pandemic. Management believes that the allowance for loan losses, which was $4.2 million, or 1.56% of gross loans, at September 30, 2021, is adequate to cover losses inherent in the loan portfolio.

Investment Securities. Investment securities, all of which are available-for-sale, increased $27.4 million, or 172.3%, to $43.3 million at September 30, 2021 from $15.9 million at December 31, 2020 as a result of investments made in U.S. treasuries, mortgage-backed securities and other corporate obligations.

Bank Owned Life Insurance. At September 30, 2021, our investment in bank owned life insurance was $11.1 million, an increase of $213,000, or 2.0%, from $10.9 million at December 31, 2020. We invest in bank owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. Our investment in bank owned life insurance at September 30, 2021 was 15.7% of our Tier 1 capital plus our allowance for loan losses.

Deposits. Total deposits increased $0.2 million, or 0.1%, to $294.3 million at September 30, 2021 from $294.1 million at December 31, 2020. Non-interest-bearing demand accounts increased $5.9 million, or 20.5%, to $34.7 million at September 30, 2021, from $28.8 million at December 31, 2020. Interest-bearing demand accounts increased $1.8 million, or 1.2%, to $148.3 million at September 30, 2021, from $146.5 million at December 31, 2020. Savings accounts increased $2.4 million, or 7.4%, to $34.7 million at September 30, 2021 from $32.3 million at December 31, 2020. Certificates of deposit decreased $10.0 million, or 11.5%, to $76.6

million at September 30, 2021 from $86.6 million at December 31, 2020. The decrease in certificates of deposit resulted primarily from a decrease in offered rates.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $9.5 million, or 100%, as all outstanding advances were paid off in July 2021 so nothing was outstanding as of .September 30, 2021. As of September 30, 2021, we had $18.4 million in credit available with the Federal Home Loan Bank of Atlanta. In addition to the Federal Home Loan Bank of Atlanta availability, we have three unsecured federal funds line of credit, in the aggregate amount of $19.5 million. No amount was outstanding on these lines of credit at or during the period ended September 30, 2021.

Stockholders’ Equity. Total equity increased $45.3 million, or 113.5%, to $85.2 million at September 30, 2021 from $39.9 million at December 31, 2020. The increase resulted primarily from completion of the Conversion and consolidated net income of $1.9 million for the nine months ended September 30, 2021.

Comparison of Operating Results for the Three Months Ended September 30, 2021 and 2020

General. Net income increased $264,000, or 79.0%, to $598,000 for the three months ended September 30, 2021, compared to $334,000 for the third quarter of 2020. The increase in net income resulted from $358,000 and $182,000 increases in net interest income and other income respectively, combined with a $73,000 decrease in the provision for loan losses, partially offset by a $264,000 increase in other operating expenses.

Interest Income. Interest income increased $63,000 or 1.9%, to $3.4 million for the three months ended September 30, 2021 from $3.3 million for the third quarter of 2020. This increase was primarily attributable to an increase in interest earned on loans and investment securities which was partially offset by a lower yield on our deposits with other banks and federal funds sold. The average balance of loans, including loans held for sale, decreased $9.1 million, or 3.3%, to $268.2 million for the three months ended September 30, 2021 from $277.3 million for the three months ended September 30, 2020, and the average yield on loans increased 0.23% to 4.75% for the three months ended September 30, 2021 from 4.52% for the three months ended September 30, 2020. The average balance of investment securities increased $12.7 million, or 66.1%, to $31.2 million for three months ended September 30, 2021 from $19.2 million for the three months ended September 30, 2020, while the average yield on investment securities decreased 23 basis points to 1.38% for the three months ended September 30, 2021 from 1.61% for the three months ended September 30, 2020. The average balance of other interest-earning deposits increased $33.3 million, or 133.7%, to $58.2 million for three months ended September 30, 2021 from $24.9 million for the three months ended September 30, 2020 and the average yield on other interest-earning deposits decreased 67 basis points to 0.32% for the three months ended September 30, 2021 from 0.99% for the three months ended September 30, 2020.

Interest Expense. Total interest expense decreased $296,000, or 56.0%, to $233,000 for the three months ended September 30, 2021 from $529,000 for the three months ended September 30, 2020. The decrease was primarily due to lower interest rates offered on all deposit products due to the lower federal funds target range which declined 150 basis points to between 0.0% and 0.25%. The average balance of interest-bearing deposits increased $4.3 million, or 1.7%, to $261.0 million for the three months ended September 30, 2021 from $256.7 million for the three months ended September 30, 2020, offset, in part, by the decline in the average cost of interest-bearing deposits of 42 basis points to 0.35% for the three months ended September 30, 2021 from 0.77% for the three months ended September 30, 2020, reflecting the lower market interest rate environment in the third quarter of 2021. The average balance of FHLB advances decreased $11.4 million, or 93.4%, to $797,000 for the three months ended September 30, 2021 from $12.2 million for the three months ended September 30, 2020. The average cost of these advances decreased 61 basis points to 0.50% for the three months ended September 30, 2021 from 1.11% for the three months ended September 30, 2020.

Net Interest Income. Net interest income increased $358,000, or 12.9%, to $3.1 million for three months ended September 30, 2021 from $2.8 million for the three months ended September 30, 2020. Our average interest-earning assets increased $36.3 million period over period. This increase was due primarily to increases in interest-earning deposits of $33.3 million and investment securities of $12.7 million combined with a $9.1 million decrease in the average balance of our loan portfolio. Our interest rate spread increased to 3.38% for the three months ended September 30, 2021 from 3.30% for the three months ended September 30, 2020, and our net interest margin increased to 3.47% for the three months ended September 30, 2021 from 3.43% for the three months ended September 30, 2020. The increase in interest rate spread and net interest margin were primarily the result of the increase in the average balances of our interest-earning assets combined with the significant reduction in our costs of funds, more than offsetting the decreases in the average yield on our interest-earning assets.

Provision for Loan Losses. We recorded $107,000 in provision for loan losses for the three months ended September 30, 2021, compared to a $180,000 provision for the three months ended September 30, 2020. The decrease in the provision for loan losses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 resulted from our analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of TC Federal Bank –

Allowance for Loan Losses.” The allowance for loan losses was $4.2 million, or 1.57% of total loans, at September 30, 2021, compared to $4.1 million, or 1.53% of total loans, at December 31, 2020, and $4.0 million, or 1.47% of total loans, at September 30, 2020. Classified (substandard, doubtful and loss) loans decreased to $4.7 million at September 30, 2021 from $6.8 million at December 31, 2020, and remained higher than the $6.1 million of classified loans at September 30, 2020. There were $690,000 in nonperforming loans at September 30, 2021 and $2.0 million in nonperforming loans at December 31, 2020 compared to $2.3 million at September 30, 2020. It should be noted that a SBA guaranteed owner occupied property securing a commercial real estate loan was moved to other real estate owned in July 2021, resulting in an increase in other real estate owned of $1.4 million. Net recoveries for the three months ended September 30, 2021 and 2020 were $21,000 and $50,000, respectively. We had no loans in deferral at December 31, 2020 or September 30, 2021.

Other Income. Other income information is as follows.


	For the three months ended September 30,				Change
	2021		2020		Amount		Percent
	(Dollars in thousands)
Service charges on deposit accounts	$	152	$	109	$	43		39.4	%
Gain on sale of loans		537		412		125		30.3	%
Other		88		74		14		18.9	%
Total non-interest income	$	777	$	595	$	182		30.6	%

Other income increased $182,000, or 30.6%, to $777,000 for the three months ended September 30, 2021 from $595,000 for the three months ended September 30, 2020. The increase was primarily due to gains on sale of mortgage loans into the secondary market of $537,000 for the three months ended September 30, 2021 from $412,000 for the three months ended September 30, 2020.

Other Expense. Other expense information is as follows.


	For the three months ended September 30,				Change
	2021		2020		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	1,892	$	1,814	$	78			4.3	%
Occupancy and equipment		217		189		28			14.8	%
Advertising		58		61		(3	)		(4.9	)%
Audit and examination		107		112		(5	)		(4.5	)%
Checking account related expenses		168		149		19			12.8	%
Consulting and advisory fees		79		8		71			887.5	%
Data system conversion costs		—		67		(67	)		(100.0	)%
Data processing fees		133		93		40			43.0	%
Director fees		68		66		2			3.0	%
Legal		48		10		38			380.0	%
Other real estate loss/(gain) on sale and writedowns		2		5		(3	)		(60.0	)%
Other		257		191		66			34.6	%
Total non-interest expense	$	3,029	$	2,765	$	264			9.5	%

Other expense increased $264,000, or 9.5%, to $3.0 million for the three months ended September 30, 2021, from $2.8 million for the three months ended September 30, 2020. The increase was due primarily to a $78,000 increase in salaries and employee benefits as $132,000 in ESOP expense was incurred and a $71,000 increase in consulting fees as outside firms assisted with the preparation of the business plan and regulatory reports for the stock offering.

Income Tax Expense. Income tax expense increased $85,000 to $183,000 for the three months ended September 30, 2021 compared to $98,000 for the three months ended September 30, 2020. The increase resulted from the $349,000 increase in income before income taxes. For the three months ended September 30, 2021, income before taxes was $781,000 compared to $432,000 for the three months ended September 30, 2020. Our effective tax rate was 23% for the three months ended September 30, 2021 and 2020.

Average Balances, Interest and Average Yields/Cost

The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material. No tax-equivalent yield adjustments have been made, as the effects would be immaterial.


				For the quarter ended September 30,
	2021			2021								2020
	Yield/rate			Average			Interest		Average			Average			Interest		Average
	At 9-30-			Balance			Earned/		Yield/			Balance			Earned/		Yield/
	2021			Outstanding			Paid		Rate			Outstanding			Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable		4.18	%	$	268,161		$	3,210		4.75	%	$	277,259		$	3,162		4.52	%
Securities available-for-sale		1.65	%		31,880			111		1.38	%		19,232			78		1.61	%
Interest-earning deposits		0.37	%		58,169			47		0.32	%		24,853			62		0.99	%
Other interest-earning assets		3.67	%		284			5		6.98	%		831			9		4.30	%
Total interest-earning assets		3.35	%		358,494		$	3,373		3.73	%		322,175		$	3,311		4.08	%
Non-interest-earning assets					10,197								16,696
Total assets				$	368,691							$	338,871
Interest-bearing liabilities:
Savings and money market accounts		0.19	%	$	141,467		$	66		0.19	%	$	120,327		$	121		0.40	%
Interest-bearing checking accounts		0.07	%		42,073			13		0.12	%		42,474			12		0.11	%
Certificate accounts		0.70	%		77,418			153		0.78	%		93,892			362		1.53	%
Total interest-bearing deposits		0.24	%		260,958			232		0.35	%		256,693			495		0.77	%
Borrowings		—	%		797			1		0.50	%		12,163			34		1.11	%
Total interest-bearing liabilities		0.24	%		261,755			233		0.35	%		268,856			529		0.78	%
Non-interest-bearing liabilities					38,857								29,607
Total liabilities					300,612								298,463
Total equity					40,967								40,408
Total liabilities and equity				$	341,579							$	338,871
Net interest income							$	3,140							$	2,782
Net earning assets				$	96,739							$	53,319
Net interest rate spread(1)		3.11	%							3.38	%							3.30	%
Net interest margin(2)										3.47	%							3.43	%
Average interest-earning assets to average interest-bearing liabilities					136.96	%							119.83	%

(1)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.


	Quarter Ended
	September 30,
	2021 vs. 2020
	Increase/
	(decrease)						Total
	due to						increase/
	Volume			Rate			(decrease)
	(In thousands)
Interest-earning assets:
Loans receivable	$	(104	)	$	152		$	48
Securities available for sale		51			(18	)		33
Interest-earning deposits		83			(98	)		(15	)
Other interest-earning assets		(6	)		2			(4	)
Total interest-earning assets		24			38			62
Interest-bearing liabilities:
Savings and money market accounts		21			(76	)		(55	)
Interest-bearing checking accounts		—			1			1
Certificate accounts		(64	)		(145	)		(209	)
Total interest-bearing deposits		(43	)		(220	)		(263	)
Borrowings		(32	)		(1	)		(33	)
Total interest-bearing liabilities		(75	)		(221	)		(296	)
Change in net interest income	$	99		$	259		$	358

Comparison of Operating Results for the Nine Months Ended September 30, 2021 and 2020

General. Net income increased $1.1 million, or 143.8%, to $1.9 million for the nine months ended September 30, 2021, compared to $793,000 for the nine months ended September 30, 2020. The increase in net income resulted from $1.1 million and $939,000 increases in net interest income and noninterest income, respectively, combined with a $657,000 decrease in the provision for loan losses, partially offset by a $1.2 million increase in other operating expenses.

Interest Income. Interest income increased $24,000 or 0.2%, to $9,846,000 for the nine months ended September 30, 2021 from $9,822,000 for the nine months ended September 30, 2020. This increase was primarily attributable to an increase in interest income on the loan portfolio offset by decreases in interest income on securities and interest earning deposits. The average balance of loans, including loans held for sale, decreased $2.1 million, or 0.8%, to $266.3 million for the nine months ended September 30, 2021 from $268.4 million for the nine months ended September 30, 2020, and the average yield on loans increased 12 basis points to 4.73% for the nine months ended September 30, 2021 from 4.61% for the nine months ended September 30, 2020. The average balance of investment securities increased $3.0 million, or 14.5%, to $23.7 million for the nine months ended September 30, 2021 from $20.7 million for the nine months ended September 30, 2020, while the average yield on investment securities decreased 71 basis points to 1.50% for the nine months ended September 30, 2021 from 2.21% for the nine months ended September 30, 2020. The average balance of other interest-earning deposits increased $37.0 million, or 142.3%, to $63.0 million for the nine months ended September 30, 2021 from $26.0 million for the nine months ended September 30, 2020, partially offset by a decrease in the average yield on other interest-earning deposits of 74 basis points to 0.30% for the nine months ended September 30, 2021 from 1.04% for the nine months ended September 30, 2020.

Interest Expense. Total interest expense decreased $1.1 million, or 57.6%, to $834,000 for the nine months ended September 30, 2021 from $2.0 million for the nine months ended September 30, 2020. The decrease was primarily due to lower interest rates offered on all deposit products due to the lower federal funds target rate which declined 150 basis points to between 0.0% and 0.25%. The average balance of interest-bearing deposits increased $20.9 million, or 8.4%, to $270.4 million for the nine months ended September 30, 2021 from $249.5 million for the nine months ended September 30, 2020, offset by the decline in the average cost of interest-bearing deposits of 62 basis points to 0.39% for the nine months ended September 30, 2021 from 1.01% for the nine months ended September 30, 2020, reflecting the lower market interest rate environment in the first nine months of 2021. The average balance of FHLB advances decreased $2.8 million, or 30.8%, to $6.3 million for the nine months ended September 30, 2021 from $9.1 million for the nine months

ended September 30, 2020. The average cost of these advances decreased 42 basis points to 0.83% for the nine months ended September 30, 2021 from 1.25% for the nine months ended September 30, 2020.

Net Interest Income. Net interest income increased $1.2 million, or 14.7%, to $9.0 million for the nine months ended September 30, 2021 from $7.9 million for the nine months ended September 30, 2020. Our average interest-earning assets increased $37.8 million period to period. This increase was due primarily to an increase in interest-earning deposits of $37.0 million combined with a $3.0 million increase in the average balance of our investment securities portfolio. Our interest rate spread increased to 3.32% for the nine months ended September 30, 2021 from 3.14% for the nine months ended September 30, 2020 and our net interest margin increased to 3.41% for the nine months ended September 30, 2021 from 3.33% for the nine months ended September 30, 2020. The increase in interest rate spread and increase in net interest margin were primarily the result of the increase in the average balances of our interest-earning assets combined with the significant reduction in our costs of funds, more than offsetting the decreases in the average yield on our interest-earning assets.

Provision for Loan Losses. We recorded $123,000 in provision for loan losses for the nine months ended September 30, 2021, compared to a $780,000 provision for loan losses for the nine months ended September 30, 2020. The decrease in the provision for loan losses for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 resulted from our analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of TC Federal Bank – Allowance for Loan Losses.”

Other Income. Other income information is as follows.


	For the nine
	months ended
	September 30,				Change
	2021		2020		Amount			Percent
	(Dollars in thousands)
Service charges on deposit accounts	$	421	$	369	$	52			14.1	%
Gain on sale of loans		1,639		744		895			120.3	%
Other		237		245		(8	)		(3.3	)%
Total non-interest income	$	2,297	$	1,358	$	939			69.1	%

Other income increased $939,000, or 69.1%, to $2.3 million for the nine months ended September 30, 2021 from $1.4 million for the nine months ended September 30, 2020. The increase was primarily due to a $895,000 increase in gain on sale of mortgage loans into the secondary market of $1.6 million for the nine months ended September 30, 2021 from $744,000 for the nine months ended September 30, 2020.

Other Expense. Other expense information is as follows.


	For the nine
	months ended
	September 30,					Change
	2021		2020			Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	5,562	$	4,721		$	841			17.8	%
Occupancy and equipment		617		548			69			12.6	%
Advertising		170		178			(8	)		(4.5	)%
Audit and examination		306		332			(26	)		(7.8	)%
Checking account related expenses		416		448			(32	)		(7.1	)%
Consulting and advisory fees		135		35			100			285.7	%
Data system conversion costs		1		122			(121	)		(99.2	)%
Data processing fees		337		281			56			19.9	%
Director fees		231		186			45			24.2	%
Legal		37		5			32			640.0	%
Other real estate loss/(gain) on sale and writedowns		4		(1	)		5			(500.0	)%
Other		853		566			287			50.7	%
Total non-interest expense	$	8,669	$	7,421		$	1,248			16.8	%

Other expense increased $1.2 million, or 16.8%, to $8.7 million for the nine months ended September 30, 2021, from $7.4 million for the nine months ended September 30, 2020. The increase was due primarily to a $841,000 increase in salaries and employee benefits as additional lending and business development staff have been retained and variable incentive compensation was paid on the mortgage

loan gains recognized on the sale of loans into the secondary market. Consulting fees increased $100,000 or 285.7%, to $135,000 for the nine months ended September 30, 2021, compared to $35,000 for the nine months ended September 30, 2020, as outside firms assisted in the preparation of the business plan and regulatory reports for the stock offering in 2021.

Income Tax Expense. Income tax expense increased $266,000 to $584,000 for the nine months ended September 30, 2021 compared to $218,000 for the nine months ended September 30, 2020. The increase resulted from the $1.5 million increase in income before income taxes. For the nine months ended September 30, 2021, income before taxes was $2.5 million compared to $1.0 million for September 30, 2020. Our effective tax rate was 23% for the nine months ended September 30, 2021, compared to 22% for the nine months ended September 30, 2020.

Average Balances, Interest and Average Yields/Cost


				For the nine months ended September 30,
	2021			2021								2020
	Yield/rate			Average			Interest		Average			Average			Interest		Average
	At 9-30-			Balance			Earned/		Yield/			Balance			Earned/		Yield/
	2021			Outstanding			Paid		Rate			Outstanding			Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable		4.18	%	$	266,312		$	9,422		4.73	%	$	268,395		$	9,245		4.61	%
Securities available-for-sale		1.65	%		23,737		266			1.50	%		20,688		342			2.21	%
Interest-earning deposits		0.37	%		63,006		140			0.30	%		25,987		203			1.04	%
Other interest-earning assets		3.67	%	530			18			4.54	%	685			32			6.25	%
Total interest-earning assets		3.35	%		353,585		$	9,846		3.72	%		315,755		$	9,822		4.16	%
Non-interest-earning assets					20,616								17,843
Total assets				$	374,201							$	333,598
Interest-bearing liabilities:
Savings and money market accounts		0.19	%	$	138,760		$	206		0.20	%	$	113,073		$	528		0.62	%
Interest-bearing checking accounts		0.07	%		51,076		35			0.09	%		37,856		32			0.11	%
Certificate accounts		0.70	%		80,543		554			0.92	%		98,556		1323			1.79	%
Total interest-bearing deposits		0.24	%		270,379			795		0.39	%		249,485			1,883		1.01	%
Borrowings		0.00	%		6,299		39			0.83	%		9,090		85			1.25	%
Total interest-bearing liabilities		0.24	%		276,678		$	834		0.40	%		258,575		$	1,968		1.02	%
Non-interest-bearing liabilities					57,148								34,573
Total liabilities					333,826								293,148
Total equity					40,375								40,450
Total liabilities and equity				$	374,201							$	333,598
Net interest income							$	9,012							$	7,854
Net earning assets				$	76,907							$	57,180
Net interest rate spread(1)		3.11	%							3.32	%							3.14	%
Net interest margin(2)										3.41	%							3.33	%
Average interest-earning assets to average interest-bearing liabilities					127.80	%							122.11	%

(1)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis


	Nine Months Ended September 30,
	2021 vs. 2020
	Increase/
	(decrease)						Total
	due to						increase/
	Volume			Rate			(decrease)
	(In thousands)
Interest-earning assets:
Loans receivable	$	(73	)	$	250		$	177
Securities available for sale		50			(126	)		(76	)
Interest-earning deposits	289				(352	)		(63	)
Other interest-earning assets		(7	)		(7	)		(14	)
Total interest-earning assets	$	259			(235	)		24
Interest-bearing liabilities:
Savings and money market accounts	120				(442	)		(322	)
Interest-bearing checking accounts	11				(8	)		3
Certificate accounts		(242	)		(527	)		(769	)
Total interest-bearing deposits		(111	)		(977	)		(1,088	)
Borrowings		(26	)		(20	)		(46	)
Total interest-bearing liabilities		(137	)		(997	)		(1,134	)
Change in net interest income	$	396		$	762		$	1,158

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Bank’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Bank’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the nine months ended September 30, 2021 in the ability of the Bank to fund its operations.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At September 30, 2021, we had $18.4 million in borrowing capacity with the Federal Home Loan Bank of Atlanta, and had no advances outstanding. In addition, we have $28.5 million in unsecured federal funds lines of credit through our correspondent banks and $6.1 million secured borrowing capacity through the Federal Reserve Bank of Atlanta. No amounts were outstanding on these lines of credit at September 30, 2021.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our current strategy to increase core deposits and the continued use of Federal Home Loan Bank of Atlanta advances as well as brokered certificates of deposit as needed, to fund loan growth.

Capital Requirements

At September 30, 2021, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 17.1%, and total qualifying capital as a percentage of risk-weighted assets was 27.7%. As of September 30, 2021, the Bank was classified as “well capitalized” for regularity capital purposes. Note 6 to the Financial Statements describes the regulatory matters applicable to us, including the capital requirements.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. Note 5 to the Financial Statements describes the financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers to which we are a party.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Item 3- Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 4 – Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

There has been no change in the Company’s internal control over financial reporting during the nine months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal proceedings

None.

Item 1A. Risk Factors

This item is not applicable to smaller reporting companies. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under the heading “Risk Factors” contained in the Prospectus. Our evaluation of the risk factors applicable to us has not changed materially from those disclosed in the Prospectus.

Risks Related to the COVID-19 Pandemic and the Associated Economic Slowdown.

The ongoing global COVID-19 outbreak could harm our business and results of operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

In March 2020, the World Health Organization declared the coronavirus to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of COVID-19 on our business and on our customers, and there is no guarantee that our efforts to address the adverse impacts of the coronavirus will be effective. Global health concerns relating to COVID-19 and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers, our borrowers and on our business, financial condition and results of operations. We may also incur additional costs to remedy damages caused by business disruptions.

Additionally, actions by U.S. federal, state and foreign governments to address the pandemic, including travel bans and school, business and entertainment venue closures, may also have a significant adverse effect on the markets in which we conduct our business. The extent of impacts resulting from the coronavirus pandemic and other events beyond our control and will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of nonperforming loans, which could adversely affect our operations, financial condition and earnings.

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. A deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:



demand for our products and services may decline;



loan delinquencies, problem assets and foreclosures may increase;



collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and



the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by pandemics, inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Risks Related to Lending Activities.

We originate commercial and multi-family real estate, commercial and industrial, and construction and land development loans, which involve credit risks that could adversely affect our financial condition and results of operations.

At September 30, 2021, commercial real estate loans totaled $83.7 million, or 31.2% of our loan portfolio, commercial and industrial loans totaled $25.6 million, or 9.5% of our loan portfolio, construction and land development loans totaled $25.3 million, or 9.4% of our loan portfolio and multi-family loans totaled $19.0 million, or 7.1% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial and multi-family real estate, construction and land development loans, and commercial and industrial loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and commercial and industrial loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Because construction and development loans rely on the demand for lots and housing, the ability of developers to repay loans can be impacted by the economy’s impact on consumers. A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. Further, unlike residential mortgage loans, commercial and industrial loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may depreciate over time, may be more difficult to appraise and may be more susceptible to fluctuation in value at default. A downturn in the economy may also impact landlords’ ability to retain and find new tenants in non-owner-occupied real estate properties. In addition, the physical condition of non-owner-occupied properties may be below that of owner-occupied properties due to lax property maintenance standards, which have a negative impact on the value of the collateral properties. As our commercial and multi-family real estate and commercial and industrial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan. We maintain an allowance for loan losses, which is established through a provision for loan losses that represents management’s best estimate of probable losses within the existing portfolio of loans. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the adequacy of the allowance for loan losses, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio and adjustment may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Consequently, a problem with one or more loans could require us to significantly increase the level of our provision for loan losses. In addition, federal regulators periodically review our allowance for loan losses and as a result of such reviews, we may have to adjust our allowance for loan losses or recognize further loan charge-offs. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses, as the process is our responsibility and any adjustment of the allowance is the responsibility of management. Material additions to the allowance would materially decrease our net income.

The Financial Accounting Standards Board (“FASB”) adopted a new credit loss accounting standard applicable to all banks, savings banks, credit unions, and financial holding companies, regardless of size and will be effective for TC Federal Bank for our fiscal year beginning on January 1, 2023. The Current Expected Credit Loss (“CECL”) rules change the current method of providing allowances for loan and lease losses (“ALLL”), which we expect may require us to increase our allowance for loan losses, and to greatly increase the data we would need to collect and review to determine the appropriate level of the ALLL. Under CECL, the allowance for credit loss is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. CECL requires an allowance to be created upon the origination or acquisition of a financial asset measured at amortized cost. Any increase in our ALLL, or expenses incurred to determine the appropriate level of the ALLL, may have a material adverse effect on our financial condition and results of operations.

Risks Related to Our Business Strategy.

Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving such growth will require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on

a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable costs involved in opening branches and expanding lending capacity that generally require a period of time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion, if done without proper due diligence and consideration of unexpected outcomes, could be expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of new branches.

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

We are dependent upon the services of the members of our senior management team who direct our strategy and operations. Members of our senior management team, or lending personnel who possess expertise in our markets and key business relationships, could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. We currently have a comprehensive succession plan in place for key members of our senior management team.

Risks Related to Interest Rates.

A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited over time as we reach historically low rate levels, as the consumer may ultimately choose to seek higher-yielding investments elsewhere. Earnings could be adversely affected if the interest rates received on loans and investment securities fall more quickly than the interest rates paid on deposits and borrowings. Simultaneously, at current interest rate levels our interest-earning assets may continue to decrease and our interest expense may increase as we find it necessary to potentially access non-core funding sources or increase deposit rates to fund our operations. A continuation of a low interest rate environment or our increasing our cost of funds may adversely affect our net interest income, and therefore earnings, which would have an adverse effect on our profitability.

Future changes in interest rates could reduce our profits and asset values.

Net income is the amount by which net interest income and non-interest income exceeds non-interest expense, provision for loan losses, and taxes. Net interest income makes up a majority of our income and is based on the difference between:



the interest income we earn on interest-earning assets, such as loans and securities; and



the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower interest rates.

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions who originate longer-term, fixed rate mortgage loans.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

Risks Related to Competitive Markets.

Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense and we experience strong competition from many other financial institutions as well as financial technology companies (“fintechs”). In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms and unregulated or less regulated non-banking entities, operating locally and elsewhere. Because technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, we also compete with fintechs seeking to disrupt conventional banking markets. In particular, the activity of fintechs has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products and a number of fintechs have applied for bank or industrial loan charters. In addition, other fintechs have partnered with existing banks to allow them to offer deposit products to their customers. Many of these competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates on more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.

Our asset size makes it more difficult for us to compete.

Our asset size makes it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Our ability to diversify economic risks is limited by our own local markets and economies. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. Finally, compared to larger institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

Risks Related to Laws and Regulations.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

TC Federal Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, and TC Bancshares, Inc. is subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such supervision and regulation governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors and borrowers of TC Federal Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to

predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have been given significant discretion in drafting the implementing rules and regulations, many of which are not in final form. As a result, we cannot at this time predict the full extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and has diverted management’s time from other business activities, all of which have adversely affected our financial condition and results of operations.

Uncertainty exists with regard to regulation of holding companies of covered savings associations.

Effective July 1, 2019, TC Federal Bank qualified as a “covered savings association” and elected to hold such status. On May 24, 2019, the Office of the Comptroller of the Currency issued a final rule and outlined nature and powers of a covered savings association as well as the applicable regulatory structure. Although as a covered savings association we are subject to the same reporting and regulatory requirements as a federal savings bank, neither the Office of the Comptroller of the Currency nor the Federal Reserve Board has adopted regulations on the treatment of covered savings association holding companies. Based on guidance from the Federal Reserve Board, TC Bancshares, Inc. is the bank holding company of a covered savings association. However, ambiguity remains on the ongoing treatment and regulation of such entities.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios and define what constitutes “capital” for calculating these ratios. The minimum capital requirements are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 to risk-based assets capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The regulations also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt out is exercised. We elected to exercise our one-time option to opt out of the requirement to include certain “available-for-sale” securities holdings for calculating our regulatory capital ratios. The regulations also establish a “capital conservation buffer” of 2.5%, resulting in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 to risk-based assets capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, repurchasing its shares, and paying discretionary bonuses, if its capital levels fall below the buffer amount.

The federal banking agencies proposed a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) of 9% that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements under the Basel Committee on Banking Supervision (“Basel III”). A “qualifying community bank” with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized.” The rule was adopted in final form, effective January 1, 2020. The CARES Act lowered the community bank leverage ratio to 8%, with federal regulation making the reduced ratio effective April 23, 2020. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.

We have analyzed the effects of these new capital requirements, and we believe that TC Federal Bank meets all of these new requirements, including the full 2.5% capital conservation buffer. Furthermore, TC Federal Bank runs an annual stress test on its loan

portfolio to determine its ability to maintain the full capital conservation buffer in the event of heightened loan losses similar or greater than those experienced by banking peers in the Great Recession.

Risks Related to Operational Matters.

We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on technology, including risk of loss related to cyber-security breaches.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions and to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, including as a result of cyber-attacks or information security breaches, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected.

In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, customer attrition, the inability of our customers to transact business with us, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”) requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

Risks Related to Accounting Matters.

Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Changes in management’s estimates and assumptions may have a material impact on our financial statements and our financial condition or operating results.

In preparing periodic reports we will be required to file under the Securities Exchange Act of 1934, including our financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject

to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. The Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan losses and our determinations with respect to amounts owed for income taxes. The uncertainty surrounding the lasting effects of the COVID-19 pandemic may negatively impact results, and our management team’s assumptions may not account for such effects.

We have a significant amount of net operating losses that we may not be able to utilize.

During the great recession, we generated significant net operating losses and unrealized tax losses (collectively, “NOLs”). As of September 30, 2021, we had an estimated federal NOL carryforward of $7.7 million and an estimated state NOL carryforward of $8.1 million, and recognized a deferred tax asset of $2.0 million related to NOL carryforward. These NOLs generally may be carried forward for a 20-year period to offset future taxable income and reduce our federal and state income tax liability, respectively. Our federal and state NOL carry-forwards begin to expire in 2031 unless previously utilized.

As a result of our conversion from mutual to stock form of ownership and our contemporaneous stock offering, it is possible that we would incur an “ownership change” under Section 382 of the Internal Revenue Code (“Section 382”). An ownership change will occur if after the conversion, the persons who are considered “owners” of TC Federal Bank before the conversion own less than 50% of our holding company’s stock immediately after the conversion. In addition, an ownership change will occur if, over a rolling three-year period, the percentage of the common stock of TC Bancshares, Inc. owned by shareholders holding 5% or more of our common stock has increased by more than 50% over the lowest percentage of common stock owned by such shareholders during the three-year period. In general, if a company incurs an ownership change under Section 382, the company’s ability to utilize an NOL carryforward to offset its taxable income becomes limited to a certain amount per year. This limitation is computed by multiplying the company’s fair market value immediately before the ownership change by a rate equal to the long-term tax-exempt rate for the month in which the ownership change occurs.

If we are unable to fully utilize the NOL carryforwards to reduce our taxable income prior to their expiration, either because of insufficient taxable income or a limitation imposed under Section 382, we will need to write off any remaining deferred tax asset and will incur additional income tax liability, which would adversely affect our results of operations.

Other Risks related to Our Business.

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

We are subject to environmental liability risk associated with lending activities or properties we own.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our policies, which require us to perform appropriate environmental due diligence when originating loans secured by certain types of commercial properties, may not be sufficient to detect all potential environmental hazards, particularly at the point of foreclosure, if necessary. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Natural disasters, acts of terrorism and other external events could harm our business.

Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. A significant natural disaster, such as a hurricane, pandemic, tornado, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for

losses that may occur. Acts of terrorism, war, civil unrest, violence, pandemics or human error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

We may be required to transition from the use of LIBOR interest rate index in the future.

Certain of our investment securities are currently indexed to LIBOR to calculate the loan interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected.

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

The Company completed its initial public offering in connection with the mutual-to-stock conversion of the Bank on July 20, 2021. The Company sold a total of 4,898,350 shares of common stock, inclusive of shares sold to its employee stock ownership plan, at $10.00 per share in the subscription offering, pursuant to a Registration Statement on Form S-1 (SEC File No. 333-254212), which was declared effective by the SEC on May 14, 2021. The offering resulted in gross proceeds of approximately $49.0 million. The net proceeds of the offering were approximately $47.7 million. The Company contributed approximately $23.9 million of the net proceeds of the offering to the Bank, $3.9 million of the net proceeds were used to fund the loan to the employee stock ownership plan and approximately $19.9 million of the net proceeds were retained by the Company. Performance Trust Capital Partners, LLC, acted as selling agent in the subscription offering.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.


2.0	Plan of Conversion of TC Federal Bank as Adopted by the Board of Directors of March 5, 2021 (incorporated by reference to Exhibit 2 of the Company’s Registration Statement on Form S-1 (Commission File No. 333-254212)).

3.1	Articles of Incorporation of TC Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (Commission File No. 333-254212)).

3.2	Amended and Restated Bylaws of TC Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 of the Company’s Form 8-K (Commission File No. 333-254212) filed June 22, 2021.

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.


31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer

101	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language) includes: (i) Condensed Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020, (ii) Condensed Statements of Income for the three and nine months ended September 30, 2021 and 2020 (unaudited), (iii) Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (unaudited), (vi) Condensed Statements of Change in Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited), (v) Condensed Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited), and (vi) the Notes to Financial Statements (unaudited) with detail tagging.

104	The cover page from TC Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (included in Exhibit 101).

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.


		TC BANCSHARES, INC. (Registrant)

Date: November 10, 2021		/s/ Gregory H. Eiford
		Gregory H. Eiford
		Chief Executive Officer

Date: November 10, 2021		/s/ Linda Palmer
		Linda Palmer
		Chief Financial Officer